According to the interest rate effect aggregate demand slopes downward (negatively) because ?
Correct answer: D. lower prices reduce money holdings increase lending interest rates fall, and investment spending increase
- A. lower prices increase money holdings decrease lending interest rates rise, and investment spending falls
- B. lower prices increase the value of money holding and consumer spending increases
- C. lower prices decrease the value of money holdings and consumers spending decreases
- D. lower prices reduce money holdings increase lending interest rates fall, and investment spending increase
Explanation
A lower price level reduces the amount of money people wish to hold in nominal terms, lowering the interest rate and encouraging investment spending. Option d expresses this chain, although “reduce money holdings” is best understood as reducing desired money balances.
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