Changes in the interest rate help explain
A)only the slope of,not shifts of aggregate demand.
B)only shifts of,not the slope of aggregate demand.
C)both the slope of and shifts of aggregate demand.
D)neither the slope nor shifts of aggregate demand.

Question

Quizplus · Accepted Answer

Changes in interest rate affect both the slope and shifts of the aggregate demand. If the interest rates decrease, it encourages more borrowing, causing increased consumer spending, housing demand, and business investment, thereby shifting the AD curve to the right. Conversely, if interest rates increase, it leads to less consumer spending and decreased business investment, shifting the AD curve to the left. Moreover, changes in interest rates can impact the slope of the AD curve as well because it alters the consumption function's MPC and marginal propensity to import.

Changes in the Interest Rate Help Explain