Substitution effects help explain the slope of the aggregate demand curve. One substitution effect refers to the
A) effect on investment expenditures that result from a change in interest rates produced by a change in the price level.
B) inverse relationship between the interest rate and the price level.
C) direct relationship between the interest rate and the real value of wealth.
D) change in wealth that results from a change in the interest rate.

Question

Quizplus · Accepted Answer

The substitution effect described in option A refers to how changes in the price level affect investment expenditures through changes in interest rates. This effect helps explain why the aggregate demand curve slopes downward: as the price level increases, interest rates rise, which in turn reduces investment and other interest-sensitive expenditures, leading to a decrease in overall demand.

Substitution Effects Help Explain the Slope of the Aggregate Demand