The interest rate effect is part of the reason
A) the short-run aggregate supply curve is upward sloping.
B) the long-run aggregate supply curve is vertical.
C) the aggregate demand curve is upward sloping.
D) the aggregate demand curve is downward sloping.

Question

Quizplus · Accepted Answer

The interest rate effect is a key reason why the aggregate demand curve slopes downward. As interest rates rise, it becomes more costly for firms and consumers to borrow and spend money, leading to a decrease in aggregate demand for goods and services. Conversely, as interest rates fall, borrowing and spending become cheaper, stimulating an increase in aggregate demand. Therefore, the interest rate effect accounts for the inverse relationship between the price level and the quantity of output demanded, as depicted by the downward-sloping aggregate demand curve.

The Interest Rate Effect Is Part of the Reason