Final answer:
The AD/AS model is more suitable than the AE model to explain the relationship between rising price levels and GDP because it accounts for price changes affecting the economy's aggregate demand and supply, impacting GDP levels. A significant increase in the stock market value generally shifts the AD curve to the right, raising both the equilibrium level of GDP and the price level.
Step-by-step explanation:
Comparison of AD/AS and AE Models
When analyzing how rising price levels affect Gross Domestic Product (GDP), the Aggregate Demand/Aggregate Supply (AD/AS) model is generally more explanatory than the Aggregate Expenditure (AE) model. The AD/AS framework considers the impact of price changes on the quantities demanded and supplied in the economy as a whole, which directly affects GDP levels. Whereas, the AE model mainly considers the relationship between total spending (consumption, investment, government spending, and net exports) and overall output when price levels are perceived as constant.
AD/AS diagram incorporates both short-term fluctuations and long-term economic growth. This versatility makes it better suited to explain situations where there are changes in the price level alongside changes in real GDP. On the other hand, while the AE model can also show changes in GDP, it lacks the depth of analysis when it comes to differing price levels.
Effect of Stock Market on AD Curve
A dramatic increase in the value of the stock market would typically shift the AD curve to the right. This indicates an overall increase in wealth, which can boost consumer confidence and lead to higher spending. This elevated spending then drives up demand for goods and services, which can raise the equilibrium level of GDP and potentially the price level, often reflecting inflationary pressures.