Author Question: An increase in the price level shifts the aggregate planned expenditure curve downward and results ... (Read 61 times)

Chelseaamend · **on:** Jun 29, 2018

An increase in the price level shifts the aggregate planned expenditure curve downward and results in a movement along the aggregate demand curve.

Why does an increase in the price level result in a shift in the aggregate planned expenditure curve rather than a movement along it?

Question 2

The equilibrium real interest rate is 5 percent. If the real interest rate is

A) anything other than 5 percent, the supply of loanable funds curve and/or the demand for loanable funds curve will shift to move the real interest rate to 5 percent.
B) 6 percent, the demand for loanable funds curve will shift rightward as firms enter the market to borrow at the lower rate.
C) 2 percent, there is a shortage of loanable funds.
D) 8 percent, there is a surplus of loanable funds.
E) 3 percent, then the supply of loanable funds curve will shift leftward as new savers enter the market.

tennis14576 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The increase in the price level shifts the aggregate planned expenditure curve because the aggregate planned expenditure curve plots expenditure against real GDP. In other words, the curve shows how aggregate planned expenditure changes when real GDP changes. Thus a change in real GDP results in a movement along the aggregate planned expenditure curve. But the effect from an increase in the price level creates a shift in the curve because at any level of real GDP, a higher price level means a lower level of expenditure. Because the effect of the higher price level applies at all levels of real GDP, the aggregate planned expenditure curve shifts downward.

Answer to Question 2

D