The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things equal, in the aggregate expenditures model,
A) changes in the price level have no effect on the equilibrium level of GDP.
B) an increase in the price level increases the real value of wealth.
C) the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level.
D) the level of aggregate expenditures and therefore the level of real GDP vary directly with the price level.

Question

Quizplus · Accepted Answer

The aggregate expenditures model and the aggregate demand curve are reconciled through the understanding that, other things being equal, the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level. This means that as the price level falls, the real value of money holdings increases, leading to higher spending and thus a higher level of real GDP. This inverse relationship is a key aspect of the downward sloping aggregate demand curve.

The Aggregate Expenditures Model and the Aggregate Demand Curve Can