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

Question

Quizplus · Accepted Answer

An increase in the price level leads to a decrease in the purchasing power of money, which reduces the amount of goods and services that can be purchased with a given amount of money. As a result, consumers may reduce their spending, and firms may reduce their investment. This decrease in expenditure is due to the fact that current prices rise relative to future prices, which makes people more likely to save rather than spend. Thus, choice C is the best answer.

An Increase in the Price Level Decreases Planned Expenditures Because