If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right.
A) downward; steeper
B) downward; flatter
C) upward; steeper
D) upward; flatter

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the supply of money will lead to an increase in spending and aggregate demand. This will shift the aggregate demand curve to the right. However, as real GDP increases, the economy is able to produce more output, so the effect of additional money on the price level becomes relatively smaller. Therefore, the aggregate demand curve slopes downward but gets flatter as it moves farther to the right.

If an Aggregate Demand Curve Is Drawn with Real GDP