If the price level rises as real GDP increases, the multiplier effects of any given change in aggregate expenditures are smaller than they would be if the price level remains constant.

Question

Quizplus · Accepted Answer

This is because rising prices reduce the purchasing power of households and firms, which can lead to a decrease in their consumption and investment. As a result, any increase in aggregate expenditures has a smaller impact on real GDP because it is partly offset by the decrease in consumption and investment due to higher prices.

If the Price Level Rises as Real GDP Increases, the Multiplier