13) Suppose there is an exogenous increase in the domestic price level. B) a rise in desired consumption. Of increase, decrease, or stay the same, the effect on the equilibrium interest rate when the domestic price level decreases, ceteris paribus. 4. Explain each. Thus, an increase in the price level (i.e.,inflation) will cause an increase in average interest rates in an economy. The domestic currency price of a representative foreign expenditure basket is A) P, the domestic price level. The real GDP is the difference between nominal GDP and inflation rate. D) P , the foreign price level. How does each of the following changes affect the real gross domestic product and price level of an open economy in the short run? 3. The Sum of the Price Level Effect: A lower price level increases autonomous con­sumption (the wealth effect), autonomous investment (the interest rate effect) … C) P times E, the domestic price level times the domestic price level. Which of the individuals listed below would experience an increase in wealth? D) a downward shift of the net export function. The term used to describe a percentage increase in a country’s price level over a period of time. Multiple Choice increases Correct decreases may either increase or decrease offsets any change in Explanation All else equal, an increase in the nominal exchange rate … B 9 B) E, the nominal exchange rate. An increase in the price level will: A) increase net exports: B) reduce the value of household debt and increase investment: C) increase production costs and reduce short-run aggregate supply: D) reduce the purchasing power of household wealth and reduce consumption: 2: Answer the next question using the following graph: (25.0K) Refer to the graph. E) P times E, the foreign price level times the nominal exchange rate An exogenous fall in the domestic price level causes an increase in real wealth and A) a fall in desired investment. ♦ same prediction as long run model without PPP 2. In contrast, a decrease in the price level ( deflation) will cause a decrease in average interest rates in an economy. In Mexico, federal lawmakers shut down most of its economy on March 23, urging people to stay indoors. C) a downward shift in the AE curve. (a) An increase in the price of crude oil, an important natural resource (b) A technological change that increases the productivity of labor (c) An increase in spending by consumers Given the demand for good in the domestic market, the decrease in supply of goods will lead to increase in the price level. E) a fall in government purchases. 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