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: A decrease in the price level leads to greater real wealth and more savings, which reduces the interest rate and increases investment.

Answer 1

A decrease in the price level leads to a movement along the aggregate demand (AD) curve rather than a shift in the curve.

Step-by-step explanation:

A decrease in the price level leads to a movement along the aggregate demand (AD) curve rather than a shift in the curve. This is because a decrease in the price level affects the quantity of total spending in the economy, resulting in movement along the existing AD curve.

When the price level decreases, it leads to an increase in real wealth and more savings. This, in turn, reduces the interest rate and increases investment. Due to this increase in investment, there is a movement along the AD curve, as it represents the relationship between price level and total spending.

For example, if the initial equilibrium point is at point A on the AD curve, a decrease in the price level will cause a movement along the AD curve to a new equilibrium point B, where there is a higher level of real GDP and a lower price level.