In your own words, explain why aggregate demand is inversely related to the pric
ID: 1179089 • Letter: I
Question
In your own words, explain why aggregate demand is inversely related to the price level. Why does the explanation for the inverse relationship between price and quantity demanded for the aggregate demand curve differ from that of a demand curve for a specific good?
In your own words, explain why aggregate demand is inversely related to the price level. Why does the explanation for the inverse relationship between price and quantity demanded for the aggregate demand curve differ from that of a demand curve for a specific good?Explanation / Answer
Aggregate expenditures and price are inversely related. A rise in price level will cause a decrease in aggregate expenditures and a decrease in price level will cause an increase in aggregate expenditures. There are three things that explain why falling price levels increase aggregate expenditures.
They are:
Factors causing a shift in AD
Changes in Expectations
Current spending is affected by anticipated income and inflation
The expectations of consumers and businesses have a powerful effect on spending
When confidence falls, we see an increase in saving and businesses postpone investment projects because of worries over weak demand and lower expected profits.
Changes in Monetary Policy
Factors causing a shift in AD
Changes in Expectations
Current spending is affected by anticipated income and inflation
The expectations of consumers and businesses have a powerful effect on spending
When confidence falls, we see an increase in saving and businesses postpone investment projects because of worries over weak demand and lower expected profits.
Changes in Monetary Policy