The derivation of the aggregate demand curve (AD) in the closed economy builds upon the fact that, as the domestic price level rises, other things equal, the equilibrium level of income in the IS/LM diagram __________.
A) rises
B) is unchanged
C) falls
D) rises, is unchanged, or falls - cannot be determined without more information

Question

Quizplus · Accepted Answer

In the closed economy, as the domestic price level rises, the demand for domestic goods and services decreases relative to foreign goods and services, leading to a decrease in net exports. This decreases aggregate demand, shifting the IS curve leftward in the IS/LM diagram. As a result, the equilibrium level of income falls. Therefore, the correct choice is C.

The Derivation of the Aggregate Demand Curve (AD) in the Closed