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 these answers are correct.

Question

Quizplus · Accepted Answer

The downward slope of the aggregate demand curve is due to the negative relationship between the price level and the quantity of real output demanded. As price levels increase, the demand for real output decreases because the higher prices reduce consumers' purchasing power and discourage investment. The central bank's monetary policy responses to inflation by increasing the real interest rate, which also discourages investment and ultimately reduces output. Therefore, choice A best describes why the aggregate demand curve slopes downward.

Which of the Following Best Describes Why the Aggregate Demand