Question

Adjust the graph to show the effect of a decrease in the aggregate price level.

Which of the statements offers the best explanation for the change demonstrated in the graph?
a. Prices of goods and services decrease on average.
b. The prices of a few goods in the market dropped substantially.
c. Consumers purchase less of one product, like cars, and more of another, like clothing.
d. The law of demand dictates the behavior of the aggregate demand curve.

Answer 1

a. Prices of goods and services decrease on average.

Step-by-step explanation:

Since the aggregate demand curve shows the relationship between the aggregate price level and real GDP, a reduction in the aggregate price level is represented by a movement along the aggregate demand curve. The aggregate price level is a weighted average of the prices of all of the goods in the economy.

If only the prices of a few goods fall, it is not likely to affect the aggregate price level. The law of demand does not concern the aggregate demand curve but the relationship between the price level and the various components of aggregate demand. If consumers purchase more of one product and less of another, then the overall price level will be unaffected.