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 main reasons why the aggregate demand curve slopes downward. As interest rates rise, borrowing becomes more expensive, leading to a decrease in consumer and investment spending. This is the interest rate effect. The real wealth effect occurs when the price level falls, increasing the purchasing power of individuals' wealth, leading to an increase in consumption spending. Both of these effects contribute to the overall downward slope of the aggregate demand curve.

The Interest Rate Effect and Real Wealth Effect Are Important