When the price level falls,we would expect to see a decrease in the demand for money,ceteris paribus; and if the money supply is held constant,we would expect to see a lower interest rate and an increase in investment,which would increase aggregate demand.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, as the price level falls, the demand for money decreases because people need less money to buy the same amount of goods and services. If the money supply is held constant, this decrease in demand for money will lead to a lower interest rate because lenders will have to lower their rates in order to find borrowers. A lower interest rate will increase investment, which will increase aggregate demand.

When the Price Level Falls,we Would Expect to See a Decrease