AD will increase price level...... ?? net, Investment, investment, describes, following

cyber21

Which of the following choices best describes the effects on consumption, investment, and net exports that would result from an increase in the price level, other factors held constant?




Consumption
Investment
Net exports



A) Decrease
Decrease
Decrease



B) Decrease
Increase
Increase



C) Increase
Increase
Increase


Answer is A. But if the price level increases, doesnt that mean the aggregate demand increases thus increasing consumption, investment AND Net exports

Kiakaha

welcome mate. I have a second major in economics in my undergrad, but I can bet that I would have made the same mistake you did if this came in the exam. One of the toughest econ question I saw for level 1 (I appeared this june).

Ionutzakis

Increase in price level is basically increase in inflation , if that's so
increase in inflation
decreases consumption
increases interest rate so investment decreases
and since things are costly at home so people will sell things at home and buy from outside, net imports will increase and exports will decreases.

but how come AD is increasing , looks like AS is decreasing that's why price level is going up.

cchang

Kh.asif, i think you're right. After thinking about it i think it's just the order of the events. Because that's the only explanation..... thanks a lot for your insight.

joemoran

Kh.Asif... would it be because the dollar appreciates, and the interest rate goes up and hence the investment would decrease?