A decrease in the price level
A)increases aggregate expenditure and produces a leftward shift of the aggregate demand curve.
B)increases aggregate expenditure, but has no effect on the aggregate demand curve.
C)has no effect on aggregate expenditure.
D)increases aggregate expenditure and produces a movement down along the aggregate demand curve.
E)increases aggregate expenditure and produces a rightward shift of the aggregate demand curve.

Question

Quizplus · Accepted Answer

A decrease in price level will increase the purchasing power of consumers, leading to an increase in their consumption expenditure. This increase in consumption expenditure will lead to an increase in overall aggregate expenditure. However, it will lead to a decrease in the interest rate as well, which, in turn, will lead to an increase in investment expenditure. Both of these effects will combine to produce a movement down along the aggregate demand curve. Hence, option D is the correct answer.

A Decrease in the Price Level