Question

When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?
a. the real value of wealth
b. the interest rate
c. the value of currency in the market for foreign exchange
d. All of the above are correct.

Answer 1

Answer:

The correct answer is option d.

Explanation:

When there is an increase in the price level, the purchasing power of money decreases. People will need more amount of money to purchase the same level of goods. This will reduce the real value of wealth.  

When the purchasing power decreases and people need more amount of money to purchase the same level of goods, the demand for money will increase. This will cause the interest rate to rise as well.  

As the price level increases, domestic goods become relatively expensive. This will cause the export demands to decline. So the demand for domestic currency will also decline. This will further cause the value of currency to depreciate.