The shape of the aggregate demand curve is explained by the:
A)interest rate, real balances, and foreign trade effects.
B)rate of inflation and the natural rate of unemployment.
C)policies to stabilize prices and reduce unemployment.
D)ratchet effect.

Question

Quizplus · Accepted Answer

The aggregate demand curve is shaped by three factors: interest rate effect, real balances effect, and foreign trade effect. These factors determine the level of aggregate demand at different price levels. As price levels increase, the interest rate effect causes a decrease in investment and consumption, leading to a decrease in aggregate demand. The real balances effect suggests that as prices increase, the real value of wealth decreases, leading to a decrease in spending and aggregate demand. Finally, the foreign trade effect suggests that as prices increase, exports become more expensive relative to foreign goods, leading to a decrease in demand for domestic goods and a decrease in aggregate demand.

The Shape of the Aggregate Demand Curve Is Explained by The