In the dynamic model, the demand for goods and services decreases as the natural rate of output _____ or the real rate of interest _____.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Question

Quizplus · Accepted Answer

According to the dynamic model, the natural rate of output represents the level of output that the economy can produce without generating inflationary pressures. If the natural rate of output decreases or the real rate of interest increases, it becomes more expensive for consumers and firms to borrow money, which decreases their ability to spend and invest. This, in turn, leads to a decrease in the demand for goods and services in the economy. Therefore, the best choice is (D): decreases; increases.

In the Dynamic Model, the Demand for Goods and Services