The real wealth effect, interest rate effect, and foreign trade effect all explain why there is a(n)
A) inverse relationship between the price level and the aggregate quantity of goods demanded
B) direct relationship between the price level and the aggregate quantity of goods demanded
C) inverse relationship between the price level and the aggregate quantity of goods supplied
D) direct relationship between the price level and the aggregate quantity of goods supplied

Question

Quizplus · Accepted Answer

The real wealth effect, interest rate effect, and foreign trade effect all explain why there is an inverse relationship between the price level and the aggregate quantity of goods demanded. As the price level increases, the purchasing power of wealth decreases (real wealth effect), interest rates tend to rise (interest rate effect), and domestic goods become more expensive relative to foreign goods (foreign trade effect), all of which lead to a decrease in the quantity of goods demanded.

The Real Wealth Effect, Interest Rate Effect, and Foreign Trade