Question

A student was asked to draw an aggregate demand and aggregate supply graphLOADING... to illustrate the effect of an increase in aggregate supply. The student drew the following​ graph: The student explained the graph as​ follows: ​"An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price​ level, consumption,​ investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will​ increase, but we​ can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate​ demand, so I show the final price​ level, P3​, as being lower than the initial price​ level, P1​." Which of the following is a correct statement about the​ student's analysis? A. The student is incorrect because the aggregate demand curve does not shift because of the price level change. B. The​ student's analysis is correct. C. The student is incorrect because the price level should rise when SRAS increases. D. The student is incorrect because the aggregate demand curve should​ decrease, not increase

Answer 1

Answer:

a. The student is incorrect because the aggregate demand curve does not shift because of the price level change

Explanation:

the student was wrong to show the price level P3 as being lower than the initial price level p1 there was a shift i aggregate demand curve from AD1 to AD2.  This is because a change in aggregate demand is not as a result of a change in price level. The aggregate demand curve will shift from AD1 to AD2  if these components of aggregate demand,  consumption spending, investment spending, government spending, and spending on exports minus imports increase. The curve will shift back  to the left as these components fall.

Answer 2

Answer:

a. The student is incorrect because the aggregate demand curve does not shift because of the price level change.

Explanation:

The aggregate demand curve will shift to AD2 from AD1 if these components like consumption spending, government spending, investment spending and spending on exports excluding imports increase. The student is not correct to show that the price level P1 higher than the starting price level P3 there was a shift i aggregate demand curve to AD1 from AD2. Result of a change in price level does not affect change in aggregate demand. As component falls, the curve will shift back  to the left.