AP Macroeconomics Question 236: Answer and Explanation
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3. An increase in the price level reduces total spending in the economy because
I. consumers' incomes cannot go as far now that prices have risen.
II. foreigners by less.
III. higher prices result in higher interest rates, which lower spending.
- A. Only I is correct.
- B. I and II are correct.
- C. I and III are correct.
- D. II and III are correct.
- E. I, II, and III are correct.
Correct Answer: D
(D) When the price level rises, so does total income in the economy. Therefore I is not correct. However, foreign incomes do not rise, so foreigners buy less of our products. II is correct. III is a statement of Fisher's Hypothesis and is also correct.