The fact that real GDP decreases when the price level rises is a property of
A)the open economy effect.
B)the interest rate effect.
C)the AD curve.
D)the real-balance effect.

Question

Quizplus · Accepted Answer

The relationship between real GDP and price level is shown by the aggregate demand (AD) curve, which slopes downward due to the wealth effect, interest rate effect, and net export effect. The real-balance effect refers to the impact of changes in the price level on the purchasing power of money balances, but is not specifically related to changes in real GDP. The open economy effect refers to the impact of changes in exchange rates on net exports, and is only relevant for economies that engage in international trade. The interest rate effect refers to the impact of changes in the price level on the nominal interest rate, which in turn affects investment and consumption, but is not directly related to changes in real GDP.

The Fact That Real GDP Decreases When the Price Level