When the price level declines
A) the interest rate rises, and consumers borrow fewer funds, which causes a movement up the aggregate demand curve.
B) the interest rate falls, and consumers borrow more funds, which causes a movement down along the aggregate demand curve.
C) the interest rate is not affected, so there is no movement along the aggregate demand curve.
D) interest rates fall, and consumers borrow more funds, which causes the aggregate demand curve to shift to the left.

Question

Quizplus · Accepted Answer

When the price level declines, the real money supply increases, causing a decrease in interest rates. Lower interest rates make it more attractive for consumers to borrow money, resulting in an increase in spending and a movement down along the aggregate demand curve. As the price level decreases, consumers can purchase more goods and services with the same amount of money, leading to an increase in aggregate demand. Therefore, option B is the correct answer.

When the Price Level Declines