When nominal interest rates are are zero, the AD curve has a ________ slope because when aggregate output decreases the monetary authorities ________ lower the nominal interest rate. As inflation rises the real interest rate _______which will ________ investment and aggregate output.
A) negative; can; increases; decrease
B) negative; cannot; decrease; increase
C) positive; cannot; increases; decrease
D) positive; can; decreases; decrease

Question

Quizplus · Accepted Answer

When nominal interest rates are zero, the AD curve can have a positive slope because the monetary authorities cannot lower the nominal interest rate further. As inflation rises, the real interest rate increases, which will decrease investment and aggregate output.

When Nominal Interest Rates Are Are Zero, the AD Curve