In deriving the aggregate demand curve a ________ price level ________ the money supply in real terms,raises interest rates,and ________ the equilibrium level of aggregate output.
A)higher; reduces; raises
B)higher; reduces; lowers
C)lower; increases; raises
D)lower; increases; lowers

Question

Quizplus · Accepted Answer

In the short run, an increase in the price level (inflation) reduces the purchasing power of money, which reduces the real money supply. This, in turn, increases interest rates as people demand more money for borrowing, which reduces investment and consumption spending. Therefore, higher prices reduce aggregate demand and lower the equilibrium level of output. Thus, B is the correct choice.

In Deriving the Aggregate Demand Curve a ________ Price Level