The open economy effect and interest rate effect are two of the reasons why
A) higher price levels increase long-run aggregate supply.
B) the aggregate demand curve slopes downward.
C) capital formation does not contribute to economic growth in poor countries.
D) growth of the labor force does not contribute to economic growth in wealthy countries.

Question

Quizplus · Accepted Answer

The open economy effect and interest rate effect are two important reasons why the aggregate demand curve slopes downward. The open economy effect suggests that an increase in the price level reduces net exports, decreasing GDP and aggregate demand. The interest rate effect suggests that an increase in the price level raises the demand for money, increasing interest rates and decreasing investment and consumer spending, thereby reducing aggregate demand. Therefore, higher price levels decrease aggregate demand and shift the aggregate demand curve to the left, resulting in a downward-sloping aggregate demand curve. The other options are not related to these effects.

The Open Economy Effect and Interest Rate Effect Are Two