Because decreases in the price level decrease interest rates and increase planned aggregate expenditure and short-run equilibrium output through monetary transmission mechanism:
A) the short-run aggregate supply line is horizontal.
B) the short-run aggregate supply line is downward sloping.
C) the aggregate demand curve is horizontal.
D) the aggregate demand curve is downward sloping.

Question

Quizplus · Accepted Answer

The aggregate demand curve is downward sloping because, as the price level decreases, interest rates fall, leading to an increase in investment and consumption, which in turn increases the quantity of goods and services demanded. This relationship between the price level and the quantity of goods and services demanded explains why the aggregate demand curve slopes downward.

Because Decreases in the Price Level Decrease Interest Rates and Increase