When deriving the aggregate demand (AD) curve from the aggregate expenditure model, an increase in Canadian product prices would cause:
A)an increase in the value of household wealth and reduced consumption expenditures.
B)an increase in interest rates and lower investment expenditures.
C)an increase in exports and imports.
D)an increase in Canadian resource prices and an increase in aggregate supply.

Question

Quizplus · Accepted Answer

According to the aggregate expenditure model, an increase in Canadian product prices would cause a decrease in aggregate expenditures, as consumers and firms reduce spending due to the higher prices. This would lead to a decrease in the quantity of goods and services demanded and a leftward shift in the AD curve. This shift would also result in higher interest rates, which would reduce investment expenditures. Therefore, option B is the correct choice. Option A is incorrect because an increase in Canadian product prices would not necessarily increase household wealth. Option C is incorrect because higher Canadian product prices would not necessarily lead to an increase in exports or imports. Option D is incorrect because an increase in Canadian resource prices would lead to a rightward shift in the aggregate supply curve, not the AD curve.

When Deriving the Aggregate Demand (AD) Curve from the Aggregate