With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?
A)Wealth effect, exchange-rate effect, interest-rate effect
B)Exchange-rate effect, interest-rate effect, wealth effect
C)Interest-rate effect, wealth effect, exchange-rate effect
D)Interest-rate effect, exchange-rate effect, wealth effect

Question

Quizplus · Accepted Answer

The interest-rate effect is the most important because it affects the cost of borrowing and lending, which in turn affects investment and consumption. The exchange-rate effect is less important because it affects the price of imported and exported goods, which in turn affects the trade balance. The wealth effect is the least important because it affects the value of assets, which in turn affects consumption.

With Respect to Their Impact on Aggregate Demand for the U.S