The interest rate effect leads to a downward-sloping aggregate demand curve because a higher price level causes consumption to _____ and investment to _____.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question

Quizplus · Accepted Answer

According to the interest rate effect, as the price level increases, the demand for money increases, leading to an increase in interest rates. This causes a decrease in consumption spending and investment spending, leading to a downward-sloping aggregate demand curve. Therefore, the correct choice is A, where a higher price level causes consumption to decrease and investment to decrease.

The Interest Rate Effect Leads to a Downward-Sloping Aggregate Demand