The foreign purchases, interest rate, and real-balances effects explain why the:
A) Aggregate demand curve is downward-sloping
B) Aggregate demand curve may shift to the left or right
C) Economy will adjust towards equilibrium
D) Aggregate expenditures schedule may shift up or down

Question

Quizplus · Accepted Answer

The foreign purchases effect suggests that as foreign prices rise, net exports decrease, and aggregate demand decreases. The interest rate effect suggests that as interest rates rise, investment decreases, and aggregate demand decreases. The real-balances effect suggests that as the price level rises, the real value of wealth decreases, and consumption decreases, causing aggregate demand to decrease. Combined, these effects explain why the aggregate demand curve is downward-sloping.

The Foreign Purchases, Interest Rate, and Real-Balances Effects Explain Why