Substitution effects help explain the slope of the aggregate demand curve. One substitution effect refers to the
A) effect on investment expenditures that result from a change in interest rates produced by a change in the price level.
B) direct relationship between the interest rate and the real value of wealth.
C) change in wealth that results from a change in the interest rate.
D) inverse relationship between the interest rate and the price level.

Question

Quizplus · Accepted Answer

The substitution effect in the context of the aggregate demand curve refers to how a change in the price level affects interest rates, which in turn influences investment expenditures. As the price level decreases, interest rates tend to fall, making borrowing cheaper and encouraging more investment, thus increasing aggregate demand.

Substitution Effects Help Explain the Slope of the Aggregate Demand