1. Explain carefully: “A change in the price level shifts the aggregate expenditures curve but not the aggregate demand curve.”
1. Explain carefully: âA change in the price level shifts the aggregate expenditures curve but not the aggregate demand curve.â
Answer: A change in the price level does not shift the aggregate demand curve. It simply represents a movement along the curve, because there is an inverse relationship between the price level and aggregate quantity demanded.
However, a change in the price level will shift the aggregate expenditures curve, which responds to the wealth, interest-rate, and foreign purchases effects occurring with a change in price level. When the price level declines, aggregate expenditures will rise, and when the price level rises, aggregate expenditures will fall. The aggregate expenditures model assumes a constant price level, so it is expressed in ârealâ terms. Appendix Figures 1 and 2 graphically illustrates the relationship between the two models.