Other things being equal, the higher the price level, the lower the level of domestic output purchased.This occurs because of:
A)the real-balances effect.
B)consumer spending on capital goods.
C)the full-employment-unemployment rate.
D)the sensitivity to demand-pull inflation.

Question

Quizplus · Accepted Answer

The real-balances effect occurs when a rise in the price level reduces the purchasing power of money, which decreases the quantity of real GDP demanded. Therefore, as the price level increases, people's real wealth decreases, and they are less able to afford the same level of output as before.

Other Things Being Equal, the Higher the Price Level, the Lower