Which of the following correctly describes how an increase in the price level affects consumption spending?
A)An increase in the price level raises real wealth, which causes consumption to increase.
B)An increase in the price level decreases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase.
C)An increase in the price level increases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase.
D)An increase in the price level lowers real wealth, which causes consumption to decrease.
E)An increase in the price level, lowers the nominal interest rate which increases purchases of consumer durables.

Question

Quizplus · Accepted Answer

An increase in the price level lowers the purchasing power of money, which reduces real wealth and, in turn, reduces consumption spending. This is because households will have to spend more money to purchase the same amount of goods and services, leaving less money for other expenditures.

Which of the Following Correctly Describes How an Increase in the Price