An increase in the price level leads to
A) a downward shift in the AE curve and a movement upward along the AD curve.
B) a downward shift in both the AE and AD curves.
C) a downward shift in the AD curve and a movement downward along the AE curve.
D) a leftward movement along both the AE and AD curves.
E) an upward shift in the AE curve and a movement upward along the AD curve.

Question

Quizplus · Accepted Answer

An increase in the price level causes a decrease in consumption expenditures, investment, and net exports in the aggregate expenditure (AE) model, which leads to a downward shift in the AE curve. At the same time, the increase in the price level causes a decrease in real GDP demanded, which leads to a movement upward along the aggregate demand (AD) curve. Therefore, the correct answer is A.

An Increase in the Price Level Leads to