A Rise in the Price Level Has a Direct Effect

question 94

Multiple Choice

A rise in the price level has a direct effect on spending because

• A) people like to spend more when prices are higher.
• B) the real value of the money people have varies directly with the price level.
• C) the real value of the money people have decreases and they can buy less with it.
• D) a higher price gives people more money, and so the more goods and services they can buy.

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Definitions:

Long-Run Equilibrium

A state in which all factors of production and markets in an economy are in balance, and all firms in the market are earning normal profits with no inclination to enter or exit the market.

Internal Diseconomies

Increased per unit costs that occur when a firm or industry grows beyond a certain size, leading to inefficiencies.

External Diseconomies

Negative effects experienced by third parties or the general public due to the activities of a business or industry, not reflected in market costs.

Decreasing-Cost Industry

An industry where the cost per unit of output decreases as the scale of production increases is known as a decreasing-cost industry.