Final answer:
The aggregate demand curve shows the inverse relationship between price level and output demand and slopes downwards. The statement regarding the value of ¯m is true; a higher ¯m implies less reduction in output when inflation increases, due to an economy's higher response to policies or spending propensity.
Step-by-step explanation:
To graph the aggregate demand curve, we plot the overall quantity of goods and services demanded at various price levels during a given time period. It generally slopes downwards indicating an inverse relationship between price level and output demand.
The statement 'A higher value for ¯m leads to a smaller decrease in output when inflation increases' is true. In this context, ¯m likely refers to the parameter in macroeconomic models that represents some form of fiscal or monetary policy effectiveness or marginal propensity to consume. A higher ¯m value can be interpreted as the economy being more responsive to policy measures or having a higher propensity to spend, thus mitigating the impact of inflation on output.
When inflation rises, if ¯m is high, households and businesses are likely to continue spending despite the increase in price levels, which implies that the output will not decrease as significantly as it would if ¯m were lower.