Thus, an increase in the price level (i.e.,inflation) will cause an increase in average interest rates in an economy. The real GDP is the difference between nominal GDP and inflation rate. The term used to describe a percentage increase in a country’s price level over a period of time. D) P , the foreign price level. In Mexico, federal lawmakers shut down most of its economy on March 23, urging people to stay indoors. The global increase in domestic violence during the lockdown period has received relatively little attention, though CNN recently reported on the increase south of the US border. Of increase, decrease, or stay the same, the effect on the equilibrium interest rate when the domestic price level decreases, ceteris paribus. How does each of the following changes affect the real gross domestic product and price level of an open economy in the short run? B) a rise in desired consumption. Which of the individuals listed below would experience an increase in wealth? B) E, the nominal exchange rate. (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 This means that a rise in the domestic price level will cause net expenditure on foreign goods to fall. 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. Interest rates: a rise in the domestic interest rate ♦ lowers domestic money demand, ♦ increasing the domestic price level, ♦ causes a proportional increase in the domestic price level, ♦ causing a proportional depreciation in the domestic currency (through PPP). 4. An exogenous fall in the domestic price level causes an increase in real wealth and A) a fall in desired investment. 3. ♦ same prediction as long run model without PPP 2. For a given domestic and foreign price level, an increase in the nominal exchange rate _____ the real exchange rate. E) P times E, the foreign price level times the nominal exchange rate Explain each. The domestic currency price of a representative foreign expenditure basket is A) P, the domestic price level. 13) Suppose there is an exogenous increase in the domestic price level. D) a downward shift of the net export function. Given the demand for good in the domestic market, the decrease in supply of goods will lead to increase in the price level. The Sum of the Price Level Effect: A lower price level increases autonomous consumption (the wealth effect), autonomous investment (the interest rate effect) … C) a downward shift in the AE curve. In contrast, a decrease in the price level ( deflation) will cause a decrease in average interest rates in an economy. E) a fall in government purchases. 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 C) P times E, the domestic price level times the domestic price level.