Question

For this scenario dealing with aggregate demand, does it cause a movement along the curve or a shift in the curve? Explain your response

Q: Due to an increase in the price level in the United States, consumers substitute out of clothes made in the United States and into clothes made in Nicaragua.

Answer 1

In this scenario, an increase in the price level causes a movement along the aggregate demand curve as consumers substitute out of clothes made in the United States and into clothes made in Nicaragua.

Step-by-step explanation:

In this scenario, an increase in the price level in the United States causes consumers to substitute out of clothes made in the United States and into clothes made in Nicaragua. This situation represents a movement along the aggregate demand (AD) curve rather than a shift in the curve.

When the price level increases, the aggregate quantity demanded of goods and services decreases. In this case, consumers are substituting one type of good (clothes made in the United States) for another (clothes made in Nicaragua) due to the relative affordability of the latter. This results in a movement along the AD curve as the quantity demanded changes in response to changes in price level, rather than a shift in the curve caused by factors like changes in consumer spending or government policies.

It is important to differentiate between movements along the curve and shifts in the curve when analyzing changes in aggregate demand.