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
A) LM curve shifts to the left.
B) LM curve shifts to the right.
C) IS curve shifts to the left.
D) IS curve shifts to the right.

Question

Quizplus · Accepted Answer

As the domestic price level rises, the demand for money increases, leading to an increase in the interest rate. With the LM curve representing the combinations of interest rates and output levels that maintain equilibrium in the money market, an increase in the interest rate causes the LM curve to shift to the left. This, in turn, leads to a decrease in output and a shift in the IS curve to the left. As a result, for any given level of output in the short run, the aggregate demand curve slopes downward, with higher price levels leading to lower levels of real output demanded.

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