How does an increase in the price level affect the position of the C + I + G + X curve and in turn the equilibrium level of real GDP?
A) The C + I + G + X curve shifts down, thereby reducing the equilibrium level of real GDP.
B) The C + I + G + X curve shifts down, thereby increasing the equilibrium level of real GDP.
C) The C + I + G + X curve shifts up, thereby reducing the equilibrium level of real GDP.
D) The C + I + G + X curve shifts up, thereby increasing the equilibrium level of real GDP.

Question

Quizplus · Accepted Answer

An increase in the price level reduces the purchasing power of consumers, which in turn reduces their consumption spending (C) and shifts the C + I + G + X curve downward. Investment (I) spending may also decrease due to the increased cost of borrowing, further reducing the C + I + G + X curve. The equilibrium level of real GDP decreases as a result.

How Does an Increase in the Price Level Affect the Position