An Increase in the Price Level Causes

question 387

Multiple Choice

An increase in the price level causes

• A) reduced investment spending, because interest rates increase, but an increase in net exports as U.S. residents buy fewer imports. The change in investment is usually greater than the change in net exports.
• B) a reduction in net exports as higher priced U.S. goods induce foreigners to buy fewer American products, and an increase in investment spending as the higher prices make businesses more profitable.
• C) reduced investment spending, because interest rates increase and a decrease in net exports as the higher prices induce foreigners to buy fewer U.S. goods.
• D) increased government spending, which crowds out investment spending, so that the net effect on aggregate demand is nil.

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Definitions:

Total Revenue

The cumulative revenue a business earns from its sales or service provisions in a given timeframe.

Total Cost

The aggregate cost of all inputs used in the production of goods or services, including fixed and variable costs.

Purely Competitive Seller

A seller in a market where there are many sellers and buyers, the product is standardized, and no single seller can influence the market price.

Shut Down

A temporary closure of a business or operation.