Other things equal,in the short run a lower price level leads households to
A)increase consumption and firms to buy more capital goods.
B)increase consumption and firms to buy fewer capital goods.
C)decrease consumption and firms to buy more capital goods.
D)decrease consumption and firms to buy fewer capital goods.

Question

Quizplus · Accepted Answer

In the short run, a lower price level means that households have more purchasing power, as their income can buy more goods and services. This leads to an increase in consumption. Firms, on the other hand, may respond to lower prices by increasing investment in new capital goods, as the lower prices make these investments more profitable. Therefore, a lower price level leads households to increase consumption and firms to buy more capital goods.

Other Things Equal,in the Short Run a Lower Price Level