The interest rate effect of a change in the aggregate price level causes the:
A) long-run aggregate supply curve to be vertical.
B) aggregate demand curve to be negatively sloped.
C) short-run aggregate supply curve to be positively sloped.
D) aggregate demand curve to be positively sloped.

Question

Quizplus · Accepted Answer

The interest rate effect explains why the aggregate demand curve is negatively sloped: as the aggregate price level rises, the purchasing power of money decreases, leading people to hold more money for transactions. This increases the demand for money, leading to higher interest rates, which in turn reduces investment and consumption, thereby decreasing the quantity of goods and services demanded.

The Interest Rate Effect of a Change in the Aggregate