The level of aggregate output demanded rises when the price level falls, because the resulting decrease in the interest rate will lead to
A) higher investment spending and higher consumption spending.
B) lower investment spending and higher consumption spending.
C) higher investment spending and lower consumption spending.
D) lower investment spending and lower consumption spending.

Question

Quizplus · Accepted Answer

When the price level falls, the interest rate decreases. This decrease in the interest rate reduces the cost of borrowing, leading to higher investment spending. Additionally, lower prices increase the real value of households' wealth, which leads to higher consumption spending. Therefore, the level of aggregate output demanded rises when the price level falls due to higher investment and consumption spending.

The Level of Aggregate Output Demanded Rises When the Price