The interest rate effect implies that
A) the aggregate demand curve has a positive slope.
B) the aggregate demand curve has a negative slope.
C) the short-run aggregate supply curve is horizontal.
D) the short-run aggregate supply curve is vertical.

Question

Quizplus · Accepted Answer

The interest rate effect is one of the reasons why the aggregate demand curve has a negative slope. When the price level in the economy increases, consumers and businesses need to spend more money to buy the same amount of goods and services. This leads to a decrease in the purchasing power of money, causing an increase in the demand for money to maintain the same level of real purchasing power. As the demand for money increases, the interest rate rises, which in turn reduces the level of investment and consumption spending in the economy, leading to a decrease in aggregate demand. Therefore, the interest rate effect implies that the aggregate demand curve has a negative slope.

The Interest Rate Effect Implies That