Question

1. The price level depends upon?

a. interest rate and employment.

b. total spending and total production.

c. the level of total spending and labor productivity.

d. unemployment rate and total production

e. total interest and market rate

Answer 1

The price level will be affected by interest rate and employment.

AD=C+I+G+X-M

It means aggregate demand constitute consumption expenditure, investment expenditure, government expenditure export and imports.

When either of consumption expenditure, investment expenditure, government expenditure and export increases or import decreases, AD increases and this leads to shift in the AD curve rightward. This leads to increase in the price level and increase in the GDP.

When interest rate increases, the borrowing becomes costly, so the investment decreases, so the AD decreases. Therefore AD curve shifts leftward and price level will decreases and vice-versa.

When employment rate decreases, the unemployment rate increases, so the bargaining power of the workers decrease. Hence the employer set lower wages. Since wage rate is low, so the cost of production decreases. This leads to decrease in the price level and vice-versa in case of increase in the employment rate.

Hence it can be said that price level depends on the interest rate and employment.

Hence option a is the correct answer.

a. interest rate and employment.