Which of the following explains why the AD curve is downward sloping?
A)a lower price level forces the government to reduce taxes,shifting the IS curve to the right and increasing income.
B)A lower price level forces the central bank to increase the money supply,shifting the LM curve to the right and increasing income.
C)A lower price level increases real money balances,shifting the LM curve to the right and increasing income.
D)none of the above are correct.

Question

Quizplus · Accepted Answer

A lower price level increases the value of real money balances, which leads to a decrease in interest rates and an increase in investment and consumption, resulting in an increase in output and income. This shift, represented by the LM curve shifting to the right, leads to a downward sloping AD curve. Option A and B are incorrect as they do not explain the relationship between the price level and the AD curve. Option D is incorrect as there is a correct choice, which is C.

Which of the Following Explains Why the AD Curve Is