Question

If the price level increases, then O A. the aggregate demand curve will shift to the left. O B. the aggregate demand curve will shift to the right. O C. there will be a movement up along a stationary aggregate demand curve. O D. none of the above will occur.

Answer 1

Answer

The correct answer is (c) there will be a movement up along a stationary aggregate demand curve.

Aggregate demand curve shows the relationship between price level and Aggregate output(or Real GDP). This relationship is negative ie. Aggregate demand curve is a downward sloping curve with price level on vertical axis and Real Output on horizontal axis and this curve shows different level of Real Output at all possible price levels. Thus change in price level will not result in new Aggregate demand curve but only result in upward movement along that same aggregate demand curve because higher price level will result in decrease in quantity of aggregate output demanded and hence new coordinate will be to the up and left of initial coordinate and thus there is upward movement along aggregate demand curve.

Note that aggregate demand curve changes when aggregate output demanded is affected by a factors other than its own price like change in Money supply, change in taxes, etc.

Hence, the correct answer is (c) there will be a movement up along a stationary aggregate demand curve.