In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on:
A) government spending.
B) firms' markup over labour costs.
C) the interest rate.
D) the expected price level.
E) the nominal wage.

Question

Quizplus · Accepted Answer

An increase in the price level leads to higher interest rates, which in turn reduces investment and consumption, causing a decrease in aggregate demand and output.

In the Aggregate Demand Relation, an Increase in the Price