We Observe an Increase in the Price Level and a Decrease

question 34

Multiple Choice

We observe an increase in the price level and a decrease in real GDP. Which of the following is a possible explanation?

• A)an increase in expected future profits
• B)an increase in expected future income
• C)an increase in factor prices
• D)an increase in the quantity of capital
• E)an increase in the quantity of money

---

Definitions:

Nominal Interest Rate

The named or quoted rate usually stated on an annually compounded basis. May be different from the effective rate due to non-annual compounding.

Real Interest Rate

The interest rate adjusted for inflation, reflecting the true cost of borrowing or real yield on an investment.

Inflation Premium

The additional interest rate that lenders demand to compensate for the loss of purchasing power of money due to inflation.

Yield Curve

The relationship between interest rates and the term of debt, generally expressed graphically. A normal yield curve is upsloping, reflecting rates that increase with increasing term. An inverted curve is downsloping.