The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _____the real interest rate and _____ the quantity of goods and services demanded.
A) decreases; decreases
B) decreases; increases
C) increases; increases
D) increases; decreases

Question

Quizplus · Accepted Answer

When the central bank reduces the nominal interest rate by more than the fall in inflation rate, it actually decreases the real interest rate. This provides an incentive for consumers to increase their consumption expenditures and businesses to increase their investments, resulting in an increase in the quantity of goods and services demanded. Therefore, the dynamic aggregate demand curve is downward sloping.

The Dynamic Aggregate Demand Curve Is Downward Sloping Because as Inflation