Other things equal, in the short run a higher price level leads households to
A)increase consumption and firms to buy more capital goods.
B)increase consumption and firms to buy fewer capital goods.
C)decrease consumption and firms to buy more capital goods.
D)decrease consumption and firms to buy fewer capital goods.

Question

Quizplus · Accepted Answer

In the short run, a higher price level leads to a decrease in household consumption, as they will have to spend more on goods and services, leading to less disposable income. This decrease in consumption also leads to firms buying fewer capital goods as firms produce fewer goods and services due to the decrease in demand.

Other Things Equal, in the Short Run a Higher Price