Why, in principle, would one expect the ad curve to be vertical? one expects the ad curve to be vertical because when the price level rises, people's real wealth also rises, which offsets the negative effect that a higher price level has on the quantity of aggregate demand. all prices rise together. that is, since wages have risen as much as prices for consumer goods, no relative prices have changed and therefore people's decisions to consume should not change either. nominal interest rates also rise, which offsets the negative effect that a higher price level has on the quantity of aggregate demand?

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sunlightdancer2037 sunlightdancer2037

16-01-2018
Business

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Why, in principle, would one expect the ad curve to be vertical? one expects the ad curve to be vertical because when the price level rises, people's real wealth also rises, which offsets the negative effect that a higher price level has on the quantity of aggregate demand. all prices rise together. that is, since wages have risen as much as prices for consumer goods, no relative prices have changed and therefore people's decisions to consume should not change either. nominal interest rates also rise, which offsets the negative effect that a higher price level has on the quantity of aggregate demand?

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ahmedishaal ahmedishaal · Answer 1 · 2018-01-28T18:46:52+01:00

The answer is "One expects the AD curve to be vertical because when the price level rises, all prices rise together. That is, since wages have risen as much as prices for consumer goods, no relative prices have changed and therefore people's decisions to consume should not change either".

AD curve means the aggregate demand curve which represents the total quantity of all goods that are demanded by the economy at various price levels. we can also say that the AD curve represents the relationship between AD and the price level. It is considered that the AD curve will slope down from left to right, the reason is that all the components of AD, except imports, are inversely related to the price level.