An increase in the price level will
A)increase consumption because goods are more expensive
B)make the consumption function steeper
C)increase consumption because wages will increase
D)decrease consumption because falling interest rates make it cheaper to borrow
E)decrease consumption because the value of net wealth has decreased

Question

Quizplus · Accepted Answer

An increase in the price level decreases the value of money, which leads to a decrease in the purchasing power of consumers. As a result, consumers will be less able to afford the same quantity of goods and services, which ultimately leads to a decrease in consumption. Additionally, an increase in the price level decreases the value of net wealth, which further reduces consumption.

An Increase in the Price Level Will