Which of the following correctly describes how an increase in the price level affects consumption spending?
A) An increase in the price level lowers real wealth, which causes consumption to decrease.
B) An increase in the price level raises real wealth, which causes consumption to increase.
C) An increase in the price level increases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase.
D) An increase in the price level decreases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase.
Question 2
Which of the following is a reason why decreases in the price level result in a rise in aggregate expenditure?
A) Price level decreases cause firms and consumers to hold less money, which lowers the interest rate. Lower interest rates raise consumption and planned investment expenditures, which raises aggregate expenditure.
B) As the price level falls, government spending rises, which raises aggregate expenditure.
C) Price level decreases in the United States relative to other countries' lower net exports, which raises aggregate expenditure.
D) Price level decreases reduce real wealth, which causes consumption spending and aggregate expenditure to rise.
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