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

Question

Quizplus · Accepted Answer

The interest rate effect refers to the fact that a higher price level leads to a higher demand for money in order to make purchases. This increased demand for money leads to an increase in interest rates, which in turn reduces investment and consumption spending, causing a decrease in aggregate demand. Therefore, changes in the price level affect the demand for money by households and firms, which is reflected in the negative slope of the aggregate demand curve.

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