Suppose a country has no trade with other countries and people can borrow as much money as they want at the current interest rate.An increase in the price level will generate
A)a decrease in quantity demanded because of the real-balance effect.
B)a decrease in quantity demanded because of the open-economy effect and the indirect effect.
C)a decrease in quantity demanded because the real-balance effect will be stronger than the indirect effect and the open-economy effect.
D)a decrease in quantity demanded because the indirect effect will be stronger than the real-balance effect.

Question

Quizplus · Accepted Answer

In a closed economy with no trade, an increase in the price level will lead to a decrease in the quantity demanded due to the real-balance effect. This effect occurs because the increase in prices reduces the purchasing power of individuals' assets, leading them to buy fewer goods and services. Since there is no trade, the open-economy effect does not play any role in this scenario.

Suppose a Country Has No Trade with Other Countries and People