Because decreases in the price level increase the real money supply and increase planned aggregate expenditure and short-run equilibrium output according to the monetary transmission mechanism:
A) the short-run aggregate supply line is horizontal.
B) the short-run aggregate supply line is upward 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, according to the monetary transmission mechanism, a decrease in the price level increases the real money supply, which can lead to lower interest rates, increased investment and consumption, and thus higher overall demand for goods and services. This relationship between the price level and aggregate demand is what causes the aggregate demand curve to slope downward.

Because Decreases in the Price Level Increase the Real Money