The Keynesian aggregate demand curve slopes downward because for any given money supply,an increase in the price level ______ real money holdings which _____ the interest rate and _____ income.
A)increases; lowers; increases
B)reduces; raises; reduces
C)reduces; lowers; increases
D)increases; raises; reduces

Question

Quizplus · Accepted Answer

According to the Keynesian aggregate demand curve, an increase in the price level reduces real money holdings, which raises the interest rate and reduces income. This is based on the Keynesian theory that higher prices reduce consumer and business spending, which lowers income and employment. The downward slope of the curve represents the inverse relationship between the price level and real output. Therefore, as the economy approaches full employment, an increase in aggregate demand (represented by a rightward shift of the curve) is expected to raise the price level without increasing output, leading to inflation.

The Keynesian Aggregate Demand Curve Slopes Downward Because for Any