The interest rate effect on aggregate demand indicates that a(n)
A) decrease in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
B) decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
C) increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
D) increase in the supply of money will increase interest rates and decrease interest-sensitive consumption and investment spending.

Question

Quizplus · Accepted Answer

The interest rate effect on aggregate demand suggests that a decrease in the price level reduces the demand for money, which in turn lowers interest rates, making borrowing cheaper. This encourages more consumption and investment spending, thereby increasing aggregate demand.

The Interest Rate Effect on Aggregate Demand Indicates That A(n)