When the price level rises,________ declines from the wealth effect,________ declines from the interest rate effect,and ________ decline(s)from the international trade effect.
A) consumption; investment; net exports
B) consumption; consumption; consumption
C) investment; investment; net exports
D) investment; consumption; net exports
E) investment; investment; investment

Question

Quizplus · Accepted Answer

- When the price level rises, the purchasing power of consumers' wealth declines, leading to a decrease in consumption. This is known as the wealth effect.
- The interest rate effect refers to the fact that when the price level rises, interest rates also tend to rise, which makes borrowing more expensive and reduces investment.
- Finally, when a country's price level rises relative to its trading partners, its exports become more expensive and imports become relatively cheaper. This leads to a decrease in net exports.

When the Price Level Rises,________ Declines from the Wealth Effect,________

When the Price Level Rises, Declines from the Wealth Effect,