What is the interest rate effect that explains why the aggregate demand curve slopes downward?
A) It refers to the effect of changes in the price level on quantity of investment demanded which in turn affects interest rates.
B) It refers to the effect of interest rates on borrowing which in turn affects consumption spending.
C) It refers to the effect of changes in the price level on interest rates which in turn affects the quantity of investment demanded.
D) It refers to the shifts in aggregate demand when interest rates change.

Question

Quizplus · Accepted Answer

The interest rate effect refers to the effect of changes in the price level on interest rates which in turn affects the quantity of investment demanded. As the price level increases, interest rates increase, which reduces the quantity of investment demanded. This decrease in investment leads to a decrease in aggregate demand, resulting in a downward-sloping aggregate demand curve.

What Is the Interest Rate Effect That Explains Why the Aggregate