When the price level increases, .
A) aggregate demand decreases
B) real GDP remains constant
C) the quantity of real GDP demanded decreases
D) aggregate demand increases

Question

Quizplus · Accepted Answer

When the price level increases, the purchasing power of money decreases, leading to a decrease in the quantity of real GDP demanded. This is known as the wealth effect, which causes consumers to spend less due to the decrease in purchasing power. As a result, aggregate demand decreases, and real GDP may also decrease in the long run due to factors such as decreased investment and decreased incentive to produce. Choices A and D are incorrect as they suggest an increase in aggregate demand in response to higher prices, which is contrary to the wealth effect. Choice B is incorrect as real GDP can change in response to shifts in aggregate demand or in the long run due to changes in factors of production.

When the Price Level Increases,