Question

The aggregate demand curve shows the relationship between ▼ interest rates the price level inflation the money supply and ▼ consumption investment production output demanded . The aggregate demand curve is downward sloping because A. a decrease in government spending reduces prices and makes consumption demand increase. B. as income increases it causes an increase in the amount of planned expenditures. C. an increase in the price level reduces real money​ holdings, which reduces the amount of expenditures. D. an increase in the price of a good causes a decrease in market demand for that good.

Answer 1

Answer: 1. the price level; output demanded

2. C. an increase in the price level reduces real money​ holdings, which reduces the amount of expenditures.

Explanation:

1. The Aggregate Demand Curve shows the relationship beyween Price Level and Output Demanded. For instance, a lower price level induces the public to demand more output as they can afford to buy it as opposed to if price levels were higher.

2. The effect is theorized by PIGOU'S WEALTH EFFECT. It posits that, even though Nominal Supply of money is fixed in an Economy by the Central bank, Real Supply is dependant on the prices of goods and services. For instance, if the price level is high, a dollar can only buy a certain amount of a product as compared to if the prices were low. For consumers this means that their real money value has dropped which will mean that they have to reduce their expenditure since they can't afford it as much.

Answer 2

Answer:

C. An increase in the price level reduces real money​ holdings, which reduces the amount of expenditures.

Explanation:

The first factor of downward sloping is an increase in real money holdings, affecting a great amount of expenditure. Another factor that contributes to the downward sloping aggregate demand curve is the net exports effect. Net exports are the difference between exports and imports. As the general price level increases, imported goods become less expensive relative to domestic goods, causing imports to increase. At the same time, domestic goods become more expensive to foreign buyers, causing exports to decrease. Increasing imports coupled with decreasing exports decrease net exports and contribute to the downward sloping aggregate demand curve.