Consider the following sequence of events: price level $\uparrow \Rightarrow$demand for money $\uparrow \Rightarrow$equilibrium interest rate $\uparrow$
$\Rightarrow$ quantity of goods and services demanded $\darr$

This sequence explains why the

A)money-supply curve is vertical.
B)aggregate-demand curve shifts leftward in response to a monetary injection.
C)aggregate-demand curve shifts rightward in response to a monetary injection.
D)aggregate-demand curve slopes downward.

Question

Consider the following sequence of events: price level $\uparrow \Rightarrow$demand for money $\uparrow \Rightarrow$equilibrium interest rate $\uparrow$
$\Rightarrow$ quantity of goods and services demanded $\darr$

This sequence explains why the

A)money-supply curve is vertical.
B)aggregate-demand curve shifts leftward in response to a monetary injection.
C)aggregate-demand curve shifts rightward in response to a monetary injection.
D)aggregate-demand curve slopes downward.

Quizplus · Accepted Answer

The sequence describes the interest rate effect, which is one reason why the aggregate-demand curve slopes downward. As the price level rises, the demand for money increases, leading to higher interest rates, which in turn reduces the quantity of goods and services demanded.

Consider the Following Sequence of Events: Price Level ↑⇒\uparrow \Rightarrow↑⇒ Demand for Money

Consider the Following Sequence of Events: Price Level $\uparrow \Rightarrow$ Demand for Money