An increase in the price level, holding all else equal Select one: a. causes aggregate demand...

An increase in the price level, holding all else equal

Select one:

a. causes aggregate demand to decrease

b. reduces the purchasing power of wealth, so consumers spend less

c. makes consumers feel wealthier with the incomes they have, so consumers spend more

d. causes short run aggregate supply to increase

Expert Solution

A change in the price level will cause a movement along the aggregate demand curve. An increase in price level will not shift the aggregate demand curve. So, option (a) is incorrect.

An increase in the price level increases inflation in the economy. It reduces the purchasing power of he income/wealth of the consumers keeping other things equal. Everything becomes expensive in the economy. So, the consumers will spend less as there is less income to spend in the hands of the consumers. So, option (b) is correct.

Increase in price level does not make people wealthier as it reduces purchasing power rather than increasing purchansing power. People will not spend more. So, option (c) is incorrect.

A change in the price level will cause a movement along the aggregate supply curve. An increase in price level will not shift the aggregate supply curve. So, option (d) is incorrect.

Therefore, the correct option is (b).

Rahul Sunny answered 2 years ago

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