Which of the following best describes why the aggregate demand curve slopes downward?
A)If the central bank observes a high rate of inflation,the monetary policy rule dictates an increase in the real interest rate.The high interest rate reduces output by reducing investment demand in the economy.
B)If the central bank observes a low rate of inflation,the monetary policy rule dictates an increase in the real interest rate.The high interest rate reduces output by reducing investment demand in the economy.
C)If the central bank observes a high rate of inflation,the monetary policy rule dictates a decrease in the real interest rate.The low interest rate increases output by reducing investment demand in the economy.
D)If the central bank observes a low rate of inflation,the monetary policy rule dictates a decrease in the real interest rate.The low interest rate reduces output by reducing investment demand in the economy.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

The downward slope of the aggregate demand curve is due to the wealth effect, interest rate effect, and exchange rate effect. Option A describes the interest rate effect, where a higher real interest rate reduces investment demand and thus reduces output. This leads to a movement along the AD curve to a lower level of output and a lower price level, resulting in a downward slope. Options B, C, and D are incorrect as they do not correctly describe the relationship between inflation, interest rates, and output.

Which of the Following Best Describes Why the Aggregate Demand