An increase in the price level, causing a movement along the aggregate demand curve, can be explained by:

• A. an increase in aggregate supply
• B. the wealth effect, interest rate effect, and international trade effect
• C. a shift in aggregate demand due to changes in government spending
• D. a change in consumer preferences for domestic goods

Answer: (B)

Verified step by step guidance

1. Understand that a movement along the aggregate demand (AD) curve occurs when the price level changes, holding other factors constant, rather than a shift of the AD curve itself.
2. Recall that the aggregate demand curve slopes downward because of three main effects: the wealth effect, the interest rate effect, and the international trade effect.
3. The wealth effect explains that when the price level rises, the real value of money holdings falls, reducing consumer spending and thus quantity demanded of goods and services.
4. The interest rate effect states that a higher price level increases the demand for money, which raises interest rates and reduces investment and consumption spending.
5. The international trade effect means that as the domestic price level rises, domestic goods become relatively more expensive compared to foreign goods, leading to a decrease in exports and an increase in imports, reducing net exports and aggregate demand.