The interest rate effect suggests that the negative slope of the aggregate demand curve results at least in part because changes in the price level affect:
A)domestic purchases of foreign goods.
B)the holdings of money by households and firms.
C)the real purchasing power of assets.
D)the level of income.

Question

The interest rate effect suggests that the negative slope of the aggregate demand curve results at least in part because changes in the price level affect:
A)​domestic purchases of foreign goods.
B)​the holdings of money by households and firms.
C)​the real purchasing power of assets.
D)​the level of income.

Quizplus · Accepted Answer

The interest rate effect implies that as the price level rises, people need more money for transactions, leading to higher interest rates, which reduces investment and consumption, thus decreasing aggregate demand.

The Interest Rate Effect Suggests That the Negative Slope of the Aggregate