Suppose that expenditure is not very responsive to interest rates, so that a sizable increase in interest rates has only a minor effect on expenditure. In this case, changes in the price level would:
A) have no effect on output resulting in a vertical AD function.
B) have a small effect on output at best resulting in a steep AD function.
C) have a substantial effect on output resulting in a flat AD function.
D) have a massive effect on output resulting in a horizontal AD function.

Question

Quizplus · Accepted Answer

When expenditure is not very responsive to interest rates, it implies that changes in the price level (which affect interest rates and thus spending) will have a limited impact on output. This scenario leads to a steep Aggregate Demand (AD) function, as output changes only slightly for a given change in the price level.

Suppose That Expenditure Is Not Very Responsive to Interest Rates