The interest rate effect suggests that the negative slope of the aggregate demand curve results, at least in part, because changes in the price level affect:
A)the level of taxes charged by the state.
B)the holdings of money by households and firms.
C)the real purchasing power of assets.
D)the level of income.
E)the quality of goods and services.

Question

Quizplus · Accepted Answer

The interest rate effect suggests that as the price level rises, households and firms need more money for transactions, leading to higher demand for money, which can increase interest rates and reduce investment and consumption, thus contributing to the negative slope of the aggregate demand curve.

The Interest Rate Effect Suggests That the Negative Slope of the Aggregate