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, ceteris paribus. Higher interest rates lower consumption and planned investment expenditures, which lowers aggregate expenditure.
C)Price level increases in Australia 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 tend to hold more money, which triggers the demand for bonds and raises the interest rate. A higher interest rate discourages both consumption and planned investment expenditures, thereby decreasing aggregate expenditure.

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