When domestic prices rise

Question

Quizplus · Accepted Answer

When domestic prices rise, the buying power of cash assets falls because the same amount of money can buy fewer goods and services. This is because inflation erodes the value of money over time, reducing the purchasing power of cash assets. Therefore, A is the best choice.

Option B, interest-sensitive consumption, is not directly related to rising domestic prices, but to changes in interest rates. When interest rates rise, it becomes more expensive to borrow money, leading to reduced consumption.

Option C, exports, may increase or decrease depending on various factors such as exchange rates, demand, and competitiveness.

Option D, business investment, may not necessarily rise because higher domestic prices may lead to higher production costs, reducing profitability and investment.

When Domestic Prices Rise