A rise in the price level has a direct effect on spending because
A) people like to spend more when prices are higher.
B) the real value of the money people have varies directly with the price level.
C) the real value of the money people have decreases and they can buy less with it.
D) a higher price gives people more money, and so the more goods and services they can buy.

Question

Quizplus · Accepted Answer

When the price level increases, the real value of the money people have decreases, meaning that they can buy less with the same amount of money. This directly affects spending behavior as people will be less likely to spend as much or may choose to shift their spending to lower-priced goods and services. Option A is incorrect as higher prices do not necessarily encourage people to spend more. Option B is partially correct but does not provide the direct link between price level and spending behavior. Option D is incorrect as a higher price does not give people more money.

A Rise in the Price Level Has a Direct Effect