Which of the following best explains the slope of the AD curve?
A)A change in inflation causes the real interest rate to change, which results in a change in spending.
B)A change in potential GDP causes the rate of inflation to change, which leads to a change in the real interest rate.
C)A change in the real interest rate causes the rate of inflation to change, which results in potential GDP changing.
D)A change in real GDP causes potential GDP to change, which results in the rate of inflation changing.
E)A change in inflation causes spending to change, which causes a change in the real interest rate.

Question

Quizplus · Accepted Answer

The slope of the Aggregate Demand (AD) curve is downward sloping, reflecting the inverse relationship between the price level (inflation) and the quantity of output demanded. A change in inflation affects the real interest rate, which in turn influences spending decisions across the economy. This is because as inflation rises, the real value of money decreases, leading to higher interest rates to compensate for the decreased purchasing power. Higher interest rates can reduce spending on investment and consumption, thus explaining the negative slope of the AD curve.

Which of the Following Best Explains the Slope of the AD