In deriving the aggregate demand curve from the aggregate expenditures model, we note that
A) the real-balances effect is irrelevant to both models.
B) a change in the price level will have no impact on the aggregate expenditures schedule.
C) an increase (decrease) in the price level shifts the aggregate expenditures schedule upward (downward).
D) an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward).

Question

Quizplus · Accepted Answer

In the aggregate expenditures model, a change in the price level will have no impact on the level of planned aggregate expenditures, which means that the aggregate expenditures schedule is a horizontal line. However, in the aggregate demand model, an increase in the price level will cause a decrease in the quantity of real GDP demanded, so the aggregate demand curve slopes downward. Therefore, an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward), resulting in a downward-sloping aggregate demand curve. The real-balances effect is actually relevant to both models, as it explains how changes in the price level affect the purchasing power of consumers' wealth and therefore their ability to spend.

In Deriving the Aggregate Demand Curve from the Aggregate Expenditures