An increase in the inflation rate results in ________ in the quantity of real GDP demanded because a higher price level ________.
A) an increase; increases consumption and investment
B) a decrease; increases consumption and investment
C) a decrease; reduces consumption and investment
D) an increase; reduces consumption and investment

Question

Quizplus · Accepted Answer

When the inflation rate increases, the price level also increases. This reduces the purchasing power of an individual's income, leading to a decrease in consumption as people have less disposable income to spend. Additionally, firms may invest less because higher prices increase their costs of production, leading to a decrease in investment. Therefore, an increase in the inflation rate results in a decrease in the quantity of real GDP demanded.

An Increase in the Inflation Rate Results in ________ in the Quantity