When nominal interest rates are above zero, the AD curve has a ________ slope because when the inflation rate increases the monetary authorities will ________ the real interest rate as inflation rises which will ________ investment and aggregate output.
A) negative; raise; decrease
B) negative; lower; increase
C) positive; raise; increase
D) positive; lower; increase

Question

Quizplus · Accepted Answer

When nominal interest rates are above zero, the AD curve has a negative slope because as the inflation rate increases, monetary authorities will lower the real interest rate to decrease investment, which decreases aggregate output. Therefore, the correct choice is (B).

When Nominal Interest Rates Are Above Zero, the AD Curve