By analyzing aggregate demand through its component parts,we can conclude that,everything else held constant,a decline in the inflation rate causes
A)an increase in real interest rates,an increase in investment spending,and a decline in aggregate output demand.
B)a decline in real interest rates,a decrease in investment spending,and an increase in aggregate output demand.
C)a decline in real interest rates,an increase in investment spending,and an increase in aggregate output demand.
D)an increase in real interest rates,a decline in investment spending,and a decline in aggregate output demand.

Question

Quizplus · Accepted Answer

A decline in inflation rate leads to a decline in nominal interest rates (everything else held constant), which in turn leads to a decline in real interest rates. A decline in real interest rates makes borrowing cheaper, leading to an increase in investment spending. This increase in investment spending and cheaper borrowing also leads to an increase in aggregate demand for goods and services. Therefore, a decline in inflation rate causes a decline in real interest rates, an increase in investment spending, and an increase in aggregate output demand, which is consistent with option (C).

By Analyzing Aggregate Demand Through Its Component Parts,we Can Conclude