Question

A5-6. Ceteris paribus, an increase in the domestic price level increases the price of domestic goods increases their price relative to foreign goods resulting in a downward shift of aggregate expenditures and a leftward shift of the aggregate demand curve. True, False Uncertain? Explain in detail.

Answer 1

This statement is false

It is true that when there is an increase in domestic price level, domestically manufactured goods and services are now expensive for foreigners to buy. At the same time is relative price of foreign made goods declines which means imports are increased and exports are decreased

aggregate expenditure will decrease because of decrease in net exports and aggregate expenditure curve will shift to the left. However aggregate demand will experience and upward movement along the curve because now there will be a decline in GDP which is the result of an increase in price.

Therefore the statement is not completely correct.