The relationship between the aggregate demand curve and the aggregate expenditures model is derived from the fact that:
A) A decrease in the price level shifts the aggregate expenditures schedule downward and decreases equilibrium GDP
B) A decrease in the price level shifts the aggregate expenditures schedule upward and increases equilibrium GDP
C) An increase in the price level shifts the aggregate expenditures schedule upward and increases equilibrium GDP
D) An increase in the price level shifts the aggregate expenditures schedule downward and increases equilibrium GDP

Question

Quizplus · Accepted Answer

The relationship between the aggregate demand curve and the aggregate expenditures model is that they both represent the relationship between the price level and the quantity of output demanded in the economy. In the aggregate expenditures model, a decrease in the price level leads to an increase in aggregate expenditures and an increase in equilibrium GDP. This is because as prices fall, consumption, investment, and net exports all increase, leading to a higher level of aggregate demand. This relationship is also captured in the downward sloping aggregate demand curve, where a decrease in the price level leads to an increase in real GDP demanded. Therefore, a decrease in the price level shifts the aggregate expenditures schedule upward and increases equilibrium GDP, making choice B the correct answer.

The Relationship Between the Aggregate Demand Curve and the Aggregate