Question

Suppose that there is a sudden rise in the price level. What will happen to economywide planned spending on purchases of goods and services? Why?

Short answer

These three forces reduce the combination spendingthanks to a sudden price rise.

Step-by-step solution

Distinct Force

Aexplosion in prices causesto maneuver up alongthe mixture demand curve reducing the equilibrium real GDP,this is often caused by three distinct force.

Real balance and Interest rate effects

Real balance effect:an increase inindicator reducesthe worth ofthe cash decreasing the wealth processed by the economy. Thisends up in a discount within the planned spending on the purchases ofthe products and serviceswithin the economy.

Interest rate effect: Witha rise inindicator the wealth of the individuals gets reduced this makes them to demandextra money for his or her purchases increasing the interest rates. Hence these higher interest rates,results in a discount within the planned spending onthe acquisition ofthe products and services by the economy.

Open Economy effect

The Open economy effect (exchange rate effect): Increasewithin the price of the domestically produced goods makes the residentsto shop for more of the cheaper foreign goods increasing the importsand also the foreigners buy less of the domestically produced goodsthanks to the upper prices decreasing the exports. Thisends up in a net decreasewithin the exports.
Thus,of these three forces reducethe combination spendingthanks to a sudden price rise.