ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An increase in the price level (i.e., inflation), ceteris paribus, will cause an increase in average interest rates in an economy. In contrast, a decrease in the price level (deflation), ceteris paribus, will cause a decrease in average interest rates in an economy.

Detailed explanation-2: -Which of the following best describes how wages respond to changes in the price level in the long run? Wages, as well as other input prices, can adjust to the price level in the long run. This is what makes long-run aggregate supply vertical.

Detailed explanation-3: -Price levels are leading indicators in the economy; rising prices indicate higher demand leading to inflation while declining prices indicate lower demand or deflation.

Detailed explanation-4: -A rise in aggregate demand increases the price level, but it increases Real GDP as well. This is because as aggregate demand increases, the level of output rises in the economy. Option c. is the correct answer.