The interest rate effect suggests that the negative slope of the aggregate demand curve results in part because changes in the price level affect
A)domestic purchases of foreign goods.
B)the demand for money by households and firms.
C)the real purchasing power of household wealth.
D)the level of income.

Question

Quizplus · Accepted Answer

The interest rate effect suggests that changes in the price level affect the demand for money by households and firms. When the price level increases, households and firms need to hold more money to make purchases, which increases the demand for money and raises interest rates. Higher interest rates decrease borrowing and investment, which reduces aggregate demand and contributes to the negative slope of the aggregate demand curve.

The Interest Rate Effect Suggests That the Negative Slope of the Aggregate