An increase in the price level decreases planned expenditure because
A) the real interest rate rises, increasing consumption expenditure.
B) real wealth decreases, thus decreasing expenditure.
C) domestic prices rise relative to foreign prices, increasing net exports.
D) current prices rise relative to future prices, increasing expenditure.

Question

Quizplus · Accepted Answer

An increase in the price level decreases the purchasing power of money, meaning that consumers are able to buy less goods and services with their existing income. This leads to a decrease in real wealth and therefore a decrease in planned expenditure.

An Increase in the Price Level Decreases Planned Expenditure Because