Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure?
A)Price level increases raise real wealth,which causes consumption spending and aggregate expenditure to decline.
B)Price level increases cause firms and consumers to hold more money,which raises the interest rate.Higher interest rates lower consumption and planned investment expenditures,which lowers aggregate expenditure.
C)Price level increases in the United States relative to other countries raise net exports,which lowers aggregate expenditure.
D)As the price level rises,government spending falls,which lowers aggregate expenditure.

Question

Quizplus · Accepted Answer

As the price level increases, firms and consumers hold onto more money, which leads to higher interest rates. This, in turn, lowers consumption and planned investment expenditures, thereby lowering aggregate expenditure. Choice A is incorrect as an increase in real wealth would lead to an increase in consumption spending and, hence, aggregate expenditure. Choice C is incorrect because an increase in net exports would lead to an increase in aggregate expenditure. Choice D is incorrect as government spending is not necessarily affected by an increase in the price level.

Which of the Following Is a Reason Why Increases in the Price