Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?
A)As the money supply increases, the interest rate falls, so spending rises.
B)As the money supply increases, the interest rate rises, so spending falls.
C)As the price level increases, the interest rate falls, so spending rises.
D)As the price level increases, the interest rate rises, so spending falls.

Question

Quizplus · Accepted Answer

The interest-rate effect explains that as the price level increases, people need to hold more money for transactions, which leads to an increase in the demand for money. As the demand for money increases, the interest rate rises, and higher interest rates make borrowing more expensive, which in turn reduces spending on investment and consumption, hence explaining the downward slope of the aggregate-demand curve.

Which of the Following Properly Describes the Interest-Rate Effect That