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Unformatted text preview: However, in case of changes in aggregate demand and general price level such a simple relation does not hold good. In this case since prices of all the goods are rising simultaneously there cannot be any substitution effect. Moreover, with rising price level money income of labor and other factor owners who provide their services is likely to go up. Therefore, their capacity to spend is likely to increase and demand for goods may actually rise, instead of falling, or may at least remain constant even with a rise in price level. For this reason, the inverse relationship (downward sloping curve) of the aggregate demand curve cannot be explained with the same reasoning as that of the individual demand curve. Yet the price level and aggregate demand continue to hold a negative or inverse relation because of the presence of the three distinct effects....
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- Fall '10