The aggregate demand curve shows that,if other factors are held constant,a
A) higher price level results in a decrease in the quantity of real GDP demanded.
B) higher price level results in an increase in the quantity of real GDP demanded.
C) higher price level results in a lower interest rate.
D) lower price level results in inflationary conditions.

Question

Quizplus · Accepted Answer

According to the basic principle of the aggregate demand curve, as the price level increases, the quantity of real GDP demanded decreases, assuming that other factors such as government spending, exports, and investment spending remain constant. This is because higher prices lead to a decrease in purchasing power and, therefore, consumption and investment demand. Conversely, a decrease in the price level increases real GDP demanded, as consumers and investors feel wealthier and spend more. Option B is incorrect because a higher price level leads to a decrease in the quantity of real GDP demanded, not an increase. C and D are also incorrect because the aggregate demand curve does not show a direct relationship between the price level and either the interest rate or inflationary conditions.

The Aggregate Demand Curve Shows That,if Other Factors Are Held