Chapter 4R, Problem 3MCQ

To determine

To determine the effect of an increase in the aggregate price level.

Explanation of Solution

An increase in aggregate price level does affect aggregate demand. If there is an increase in aggregate price, it will lower the aggregate demand. As a result, there will be a leftward movement along the aggregate demand curve. Therefore, option (b) is correct.

If aggregate price rises, it will increase aggregate supply because rising prices encourage producers to supply more. Therefore, there will be a rightward movement along the aggregate supply curve. Thus, option (d) is correct.

An increase in aggregate price level does affect aggregate demand. However, since these two variables have a negative relationship, there is no possibility that a rise in aggregate price will increase aggregate demand. Thus, option (a) is incorrect.

Since aggregate price is a factor that affects both aggregate demand and aggregate supply, the statement that there will be no change in aggregate demand or supply due to a rise in aggregate price is incorrect. Thus, option ( c) is incorrect.

Since the increase in aggregate price affects aggregate supply positively, the statement that a rise in aggregate price will lower the aggregate supply is incorrect. Thus, option (e ) is incorrect.

Economics Concept Introduction

Aggregate price affects both aggregate demand and aggregate supply. While aggregate price and aggregate demand have a negative relationship, aggregate price and aggregate supply have a positive association.