$$\begin{array} { | c | c | c | c | c | c | c | }
\hline \text { Price Level } & C & I _ { g } & G & X & M & \text { Real GDP } \
\hline 128 & \$ 18 & \$ 2 & \$ 3 & \$ 1 & \$ 5 & \
\hline 125 & 20 & 4 & 3 & 2 & 4 & \
\hline 122 & 22 & 6 & 3 & 3 & 3 & \
\hline 119 & 24 & 8 & 3 & 4 & 2 & \
\hline 116 & 26 & 10 & 3 & 5 & 1 & \
\hline
\end{array}$$ In the accompanying table for a particular country, C is consumption expenditures, $$I _ { g }$$ is gross
Investment expenditures, G is government expenditures, X is exports, and M is imports. All ?gures
Are in billions of dollars. The interest-rate effect of changes in the price level is shown by columns
A) Price Level and G on the table.
B) X and M on the table.
C) Price Level and $$I _ { g }$$ on the table.
D) C and G on the table.

Question

$$\begin{array} { | c | c | c | c | c | c | c | } 
\hline \text { Price Level } & C & I _ { g } & G & X & M & \text { Real GDP } \
\hline 128 & \$ 18 & \$ 2 & \$ 3 & \$ 1 & \$ 5 & \
\hline 125 & 20 & 4 & 3 & 2 & 4 & \
\hline 122 & 22 & 6 & 3 & 3 & 3 & \
\hline 119 & 24 & 8 & 3 & 4 & 2 & \
\hline 116 & 26 & 10 & 3 & 5 & 1 & \
\hline
\end{array}$$ In the accompanying table for a particular country, C is consumption expenditures, $$I _ { g }$$ is gross
Investment expenditures, G is government expenditures, X is exports, and M is imports. All ?gures
Are in billions of dollars. The interest-rate effect of changes in the price level is shown by columns
A) Price Level and G on the table.
B) X and M on the table.
C) Price Level and $$I _ { g }$$ on the table.
D) C and G on the table.

Quizplus · Accepted Answer

The interest-rate effect refers to the relationship between changes in the price level and the demand for loanable funds (which affects the interest rate). In general, an increase in the price level leads to an increase in the demand for loanable funds (which increases the interest rate) and a decrease in borrowing (consumption and investment) and an decrease in net exports (due to the appreciation of the currency). Conversely, a decrease in the price level leads to a decrease in the demand for loanable funds (which decreases the interest rate) and a increase in borrowing (consumption and investment) and an increase in net exports (due to the depreciation of the currency).

Looking at the table, changes in the price level are associated with changes in consumption (C) and gross investment (Ig), but not in government expenditures (G). Therefore, the best choice is C) Price Level and $$I _ { g }$$ on the table.

In the Accompanying Table for a Particular Country, C Is