The real-balances, interest-rate, and foreign purchases effects all help explain
A) why the aggregate demand curve is downsloping.
B) why the aggregate supply curve is upsloping.
C) shifts in the aggregate demand curve.
D) shifts in the aggregate supply curve.

Question

Quizplus · Accepted Answer

The real-balances effect explains why an increase in the price level decreases the purchasing power of money, leading to a decrease in consumption and a decrease in aggregate demand. The interest-rate effect explains why an increase in the price level increases the demand for money, leading to an increase in interest rates, which decreases investment spending and decreases aggregate demand. The foreign purchases effect explains why an increase in the price level increases the demand for foreign goods, leading to an increase in imports and a decrease in net exports, which decreases aggregate demand. Therefore, these effects help explain why the aggregate demand curve is downsloping.

The Real-Balances, Interest-Rate, and Foreign Purchases Effects All Help Explain