When the price level increases, total planned real expenditures on goods and services falls. All of the following are responsible EXCEPT
A) the substitution effect.
B) the real-balance effect.
C) the interest rate effect.
D) the open economy effect.

Question

Quizplus · Accepted Answer

The substitution effect refers to consumers substituting cheaper goods for more expensive ones as prices rise, which doesn't directly relate to a fall in total planned real expenditures due to an increase in the price level. The real-balance effect, interest rate effect, and open economy effect all explain why total planned real expenditures fall when the price level increases.

When the Price Level Increases, Total Planned Real Expenditures on Goods