Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₁ shifts to LM₂ because the price level decreases from P₁ to P₂ then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve.

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A decrease in the price level, leading to a shift in the LM curve (representing the liquidity preference and money supply relationship in the IS-LM model), indicates a movement along the aggregate demand curve rather than a shift of the curve itself. This is because the aggregate demand curve is derived from the IS-LM model by changing the price level and observing the resulting equilibrium output. A decrease in the price level makes holding money more attractive relative to bonds, decreasing interest rates (assuming money demand is a function of income and interest rates), and increasing investment and income. This is depicted as a movement down the aggregate demand curve, as lower prices increase the quantity of goods demanded.

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