The real-balances, interest rate, and foreign trade effects all help explain:
A)why the aggregate demand curve is downward sloping.
B)why the aggregate supply curve is upward sloping.
C)shifts in the aggregate demand curve.
D)shifts in the aggregate supply curve.

Question

Quizplus · Accepted Answer

The real-balances effect explains how changes in the price level affect the purchasing power of individuals and therefore their demand for goods and services. The interest rate effect explains how changes in the price level affect the demand for money and therefore the interest rate, which affects investment and consumption expenditures. The foreign trade effect explains how changes in the price level affect net exports, which are a component of aggregate demand. These three effects combine to create a downward-sloping aggregate demand curve.

The Real-Balances, Interest Rate, and Foreign Trade Effects All Help