Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
-Refer to Figure 21-2. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the
A)wealth effect.
B)interest-rate effect.
C)exchange-rate effect.
D)Fisher effect.

Question

Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. 
-Refer to Figure 21-2. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the
A)wealth effect. 
B)interest-rate effect. 
C)exchange-rate effect. 
D)Fisher effect.

Quizplus · Accepted Answer

The slope of the AD curve is primarily attributable to the interest-rate effect, which shows the relationship between changes in the interest rate and changes in aggregate demand. When interest rates are lower, consumers and businesses are more likely to borrow money, which leads to increased spending and a higher aggregate demand. When interest rates are higher, borrowing becomes more expensive, causing a decrease in spending and a lower aggregate demand. Therefore, the slope of the AD curve is determined by the relationship between interest rates and aggregate demand.