Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.

-Refer to Figure 16-2. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the
A) wealth effect.
B) interest-rate effect.
C) exchange-rate effect.
D) Fisher effect.

Question

Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
 
-Refer to Figure 16-2. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the
A) wealth effect. 
B) interest-rate effect. 
C) exchange-rate effect. 
D) Fisher effect.

Quizplus · Accepted Answer

The slope of the AD curve is primarily attributable to the interest-rate effect. As interest rates rise, the cost of borrowing increases, which in turn reduces the overall level of spending in the economy. Conversely, as interest rates fall, the cost of borrowing decreases and overall spending increases. Therefore, the slope of the AD curve is downward sloping, reflecting the inverse relationship between interest rates and overall spending.