An Indirect Effect of an Increase in the Price Level

question 60

Multiple Choice

An indirect effect of an increase in the price level works through

• A) people substituting out of domestic goods and into foreign goods as exchange rates rise.
• B) changes in trade balances as domestic goods become more expensive, causing interest rates to move in the opposite direction from the change in the exchange rate.
• C) interest rates as people save more as the higher prices make their money balances less attractive.
• D) interest rates as people borrow to maintain their money balances, bidding up interest rates and reducing total planned real expenditures.

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Definitions:

Objective Probabilities

Quantifiable likelihood or chance of an event occurring, based on statistical and empirical evidence rather than subjective judgment.

Probabilities

A measure of the likelihood that an event will occur, expressed as a number between 0 and 1, where 1 indicates certainty.

Certainty

The state of being sure or confident about something, often referencing situations in decision-making where outcomes are known.

Uncertainty

The state of being unsure about the future or about the outcome of specific processes or events.