If the price level increases, the AE curve shifts
A) upward and we move along the AD curve.
B) downward and the AD curve shifts rightward.
C) downward and we move along the AD curve.
D) upward and the AD curve shifts leftward.

Question

Quizplus · Accepted Answer

An increase in the price level will lead to a decrease in real wealth and an increase in the cost of borrowing, both of which will lead to a decrease in consumption spending, investment spending and net exports. This will cause a decrease in total spending (AE), leading to a leftward shift in the AE curve. As a result, there will be a movement along the AD curve rather than a shift in its position.

If the Price Level Increases, the AE Curve Shifts