Consider a simple macro-model with demand-determined output.An exogenous increase in the domestic price level will ________ the real value of the private sector's wealth,which leads to ________ in autonomous consumption and thus ________ shift in the AE function.
A)increase; a decrease; a downward
B)increase; an increase; a downward
C)increase; an increase; an upward
D)reduce; a decrease; a downward
E)reduce; an increase; an upward

Question

Quizplus · Accepted Answer

An exogenous increase in the domestic price level will reduce the real value of the private sector's wealth as the purchasing power of their money decreases. This leads to a decrease in autonomous consumption as people feel less wealthy and are less willing to spend. This decrease in autonomous consumption will lead to a downward shift in the AE function.

Consider a Simple Macro-Model with Demand-Determined Output