Answer to Question #12069 in Economics of Enterprise for Michelle

Question

Suppose that aggregate demand increases such that the amount of real output demanded rises by $7 billion at each price level. By what percentage will the price level increase?

Answer 1

Aggregate demand normally rises as the price level falls and it is lower at a higher price level because:
A higher price level reduces the effective purchasing power of a consumer's budget
At a higher price level interest rates tend to be higher to reduce inflation