Question

The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things

equal, in the aggregate expenditures model:
A) changes in the price level have no effect on the equilibrium level of GDP.
B) an increase in the price level increases the real value of wealth.
C) the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price
level.
D) the level of aggregate expenditures and therefore the level of real GDP vary directly with the price
level.

Answer 1

In the aggregate expenditures model, aggregate expenditures and real GDP vary inversely with the price level, which aligns with the downward-sloping aggregate demand curve in the aggregate demand/aggregate supply model.

Step-by-step explanation:

The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things equal, in the aggregate expenditures model, the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level. This is because, generally, as the price level rises, the real value of financial assets falls, leading to lower spending and therefore a lower quantity of real GDP demanded. Conversely, when the price level falls, the real value of financial assets increases, leading to higher spending and a higher quantity of GDP demanded. This relationship is depicted by a downward-sloping aggregate demand curve in the aggregate demand/aggregate supply model, reflecting the inverse relationship between the price level and the quantity of real GDP demanded.