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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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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