According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices
A) increase money holdings, decrease lending, interest rates rise, and investment spending falls.
B) increase the value of money holdings and consumer spending increases.
C) decrease the value of money holdings and consumer spending decreases.
D) reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Question

Quizplus · Accepted Answer

Lower prices reduce the need for money holdings, leading to increased lending, which causes interest rates to fall and investment spending to increase, thus increasing aggregate demand.

According to the Interest Rate Effect, Aggregate Demand Slopes Downward