Other things being equal,what is the effect of an exogenous rise in the domestic price level? There will be
A)no effect on the level of desired real expenditure.
B)an increase in the level of desired real expenditure.
C)a decrease in desired real expenditure only if it is accompanied by a change in the current income of households.
D)a decrease in desired real expenditure because it will affect the real value of wealth.
E)an increase in net exports.

Question

Quizplus · Accepted Answer

An exogenous rise in the domestic price level will affect the real value of wealth, decreasing the purchasing power of households' assets. As a result, households will have a lower desired real expenditure. Thus, the correct choice is option D. Option A is incorrect because the rise in the price level will affect the real value of wealth, which in turn affects the level of desired real expenditure. Option B is incorrect because households will have a lower desired real expenditure due to the decrease in the real value of wealth. Option C is incorrect because the decrease in desired real expenditure is due to the rise in the price level, not a change in current income. Option E is incorrect because there is no direct link between the rise in the price level and an increase in net exports.

Other Things Being Equal,what Is the Effect of an Exogenous