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

Question

Quizplus · Accepted Answer

An increase in the price level decreases planned expenditure because it reduces real wealth, which in turn decreases consumption expenditure. This is known as the wealth effect.

An Increase in the Price Level Decreases Planned Expenditure Because