Why are the interest-rate,foreign-trade and real balances effects important?
A)They help explain the shape of the aggregate supply curve.
B)They help explain why demand-management policies are ineffective in fighting stagflation.
C)They help explain shifts in the aggregate supply curve.
D)They help explain the shape of the aggregate demand curve.
E)They help explain shifts in the aggregate demand curve.

Question

Quizplus · Accepted Answer

The interest-rate, foreign-trade, and real balances effects are important in explaining the shape of the aggregate demand curve. The interest-rate effect explains how changes in interest rates affect consumption and investment spending, the foreign-trade effect explains how changes in exchange rates affect net exports, and the real balances effect explains how changes in the price level affect the purchasing power of consumers' and firms' wealth, all of which determine the level of aggregate demand.

Why Are the Interest-Rate,foreign-Trade and Real Balances Effects Important