Question

Which of the following is incorrect?

a. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward-flexible prices, reduces the price level.
b. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise.
c. As the price level falls, the demand for money declines, the interest rate declines, and interest-rate-sensitive spending increases.
d. When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.

Answer 1

The answer that is incorrect is D)

Step-by-step explanation:

First of all, it is incorrect because if prices increase, real money balances decrease. The real money balances formula explains this fact:

Real money balances (RMB) = M/P

Where M is the amount of money and P the price level.

If P increases, then M will RMB will decrease.

If RMB are less, then, houses will find themselves poorer, not wealthier, and will decrease their spending, not increase it.