The derivation of the aggregate demand curve (AD) in the open economy builds upon the Fact that, as the price level rises, other things equal,
A) the LM curve shifts to the left but the IS and BP curves do not shift.
B) the LM and BP curves shift to the left but the IS curve does not shift.
C) the IS and LM curves shift to the left but the BP curve does not shift.
D) the IS, LM, and BP curves all shift to the left.

Question

Quizplus · Accepted Answer

As the price level rises, the real value of money falls, leading to a decrease in the demand for money. This causes the LM curve to shift to the left. The higher price level also makes domestic goods more expensive relative to foreign goods, leading to a decrease in net exports. This causes the BP curve to shift to the left. Finally, the higher price level reduces real income, leading to a decrease in consumption and investment. This causes the IS curve to shift to the left.

The Derivation of the Aggregate Demand Curve (AD) in the Open