Suppose the price level falls. The result is that the:
A) aggregate supply curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) general price level would rise causing a movement up the aggregate demand curve.
D) aggregate demand curve would slope downward because of the real balances effect.

Question

Quizplus · Accepted Answer

When the price level falls, the real value of money increases, which means consumers have more purchasing power. This leads to an increase in consumption and shifts the aggregate demand curve to the right, not the aggregate supply curve. The downward slope of the aggregate demand curve is partly due to the real balances effect, which is the increase in consumption and investment spending that results from the increase in the real value of money balances when the price level falls.

Suppose the Price Level Falls