The interest rate effect of the price level is reflected in the:
A) increase in interest rates to savers.
B) upward slope in aggregate supply.
C) upward slope in aggregate demand.
D) downward slope in aggregate demand.

Question

Quizplus · Accepted Answer

The interest rate effect explains why the aggregate demand curve slopes downward: as the price level rises, the purchasing power of money decreases, leading consumers to hold more money for transactions, which in turn raises interest rates and reduces investment spending, thereby decreasing the quantity of goods and services demanded.

The Interest Rate Effect of the Price Level Is Reflected