Question

In the AS/AD model, as the price level falls, the holders of money become richer and buy more. This is one reason why the aggregate demand curve is downward sloping.

A. True
B. False

Answer 1

True

Step-by-step explanation:

The statement is true.

Suppose a consumer purchases a bundle of goods, say 40 units with his given money income of $1000.

Now, if there is a fall in the price level of the goods then this will increase the purchasing power of the consumer and hence he will be able to buy more quantity of goods, say 60 units with the same level of money income i.e $1,000.

This illustrates that as the price level falls, the purchasing power of the consumer increases or we can say that holders of money become richer.