Question : Assertion: An increase in the price level will always lead to a decrease in aggregate demand.
Reason: Higher prices reduce consumers' purchasing power, leading to a decrease in their spending and a subsequent decrease in aggregate demand.
Option 1: Both Assertion and Reason are correct, and the Reason is the correct explanation of the Assertion.
Option 2: Both Assertion and Reason are correct, but the Reason is NOT the correct explanation of the Assertion.
Option 3: Assertion is correct, but the Reason is incorrect.
Option 4: Assertion is incorrect, but the reason is correct
Correct Answer:
Both Assertion and Reason are correct, and the Reason is the correct explanation of the Assertion.
Solution : The correct answer is (A) Both Assertion and Reason are correct, and the Reason is the correct explanation of the Assertion.
The Assertion that an increase in the price level will always lead to a decrease in aggregate demand is correct. When the price level rises, it reduces consumers' purchasing power, making goods and services relatively more expensive. As a result, consumers tend to decrease their spending, which leads to a decrease in aggregate demand.
The Reason provided correctly explains this relationship. Higher prices reduce consumers' purchasing power because their income can buy fewer goods and services. This decrease in purchasing power tends to lead consumers to spend less, which in turn reduces aggregate demand. Therefore, the Reason is the correct explanation of why an increase in the price level leads to a decrease in aggregate demand.
