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Chapter 23: Problem 3

Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line? Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve?

Short Answer

Expert verified
A change in price level causes neither a movement along nor a shift of the aggregate expenditure line, but it does cause a movement along the aggregate demand curve, not a shift.

Step by step solution

01

Understanding Aggregate Expenditure Line and Aggregate Demand Curve

Firstly, get a grasp on the two terms. Aggregate expenditure is the total amount of spending in the economy that determines the level of the goods and services demanded, while the aggregate demand curve represents the total quantity of all goods (or services) demanded by the economy at different price levels.
02

The Effect of Price Level Changes on Aggregate Expenditure Line

A movement along the aggregate expenditure line is caused by a change in the total spending which includes consumption, investment, government spending, and net exports. This is not affected by changes in price level but determined by real GDP. Hence, a change in the price level does not cause a shift or a movement of the aggregate expenditure line.
03

The Effect of Price Level Changes on Aggregate Demand Curve

The aggregate demand curve, on the other hand, shows the relationship between the price level and the level of real GDP purchased in the economy. Therefore, a change in the price level will cause a movement along the aggregate demand curve and not a shift. A shift in the aggregate demand curve would mean that at each price level, the quantity demanded has changed.

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Most popular questions from this chapter

A Federal Reserve publication noted that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions." What does the author mean be "shedding of unwanted inventories"? What makes the inventories unwanted? Why would shedding inventories lead to a decline in GDP?

What are the five main determinants of consumption spending? Which of these is the most important? How would a rise in stock prices or housing prices affect consumption spending?

Explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.

Explain the difference between aggregate expenditure and aggregate demand.

(Related to the Apply the Concept on page 789) In an opinion column in the Wall Street Journal, Purdue University President Mitchell Daniels wrote that "today's 20 - and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint." Why might young people be delaying marriage and childbearing? Why would this trend be unhelpful from an economic point of view? Is the trend possibly connected with the slow recovery from the \(2007-2009\) recession? Briefly explain.
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