The interest rate effect and real wealth effect are important because they help to explain

Question

Quizplus · Accepted Answer

The interest rate effect and real wealth effect are two of the three main reasons why the aggregate demand curve is downward-sloping. The interest rate effect states that as the price level increases, the demand for money increases, causing interest rates to rise, which in turn reduces spending and therefore aggregate demand. The real wealth effect states that as the price level increases, the real value of wealth decreases, leading consumers to reduce their spending and therefore aggregate demand. Together with the third reason, the international trade effect, these two effects help explain the negative relationship between the price level and aggregate demand.

The Interest Rate Effect and Real Wealth Effect Are Important