Consider the following sequence of events:
Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
Τhis sequence explains why the
A)money-supply curve is vertical.
B)aggregate-demand curve shifts leftward in response to a monetary injection.
C)aggregate-demand curve shifts rightward in response to a monetary injection.
D)aggregate-demand curve slopes downward.

Question

Quizplus · Accepted Answer

The sequence of events implies that an increase in the price level leads to a higher demand for money which, in turn, pushes up the equilibrium interest rate. A higher interest rate reduces the quantity of goods and services that firms and households are willing and able to buy, implying a leftward shift in the aggregate-demand curve. Therefore, the correct answer is the downward slope of the aggregate-demand curve (option D).

Consider the Following Sequence of Events