An increase in the price level causes
A) reduced investment spending, because interest rates increase, but an increase in net exports as U.S. residents buy fewer imports. The change in investment is usually greater than the change in net exports.
B) a reduction in net exports as higher priced U.S. goods induce foreigners to buy fewer American products, and an increase in investment spending as the higher prices make businesses more profitable.
C) reduced investment spending, because interest rates increase and a decrease in net exports as the higher prices induce foreigners to buy fewer U.S. goods.
D) increased government spending, which crowds out investment spending, so that the net effect on aggregate demand is nil.

Question

Quizplus · Accepted Answer

C) is correct because an increase in the price level typically leads to higher interest rates, which can deter investment spending. Additionally, higher domestic prices can make U.S. goods less attractive to foreign buyers, reducing net exports.

An Increase in the Price Level Causes