Question

Why does aggregate demand slopes downwards, according to the interest rate effect?
a) lower prices increase money holdings, decrease lending, interest rates rise, and
investment spending falls.
b) lower prices increase the value of money holdings and consumer spending
increases.
c) lower prices decrease the value of money holdings and consumer spending
decreases.
d) lower prices reduce money holdings, increase lending, interest rates fall, and
investment spending increases.
​

Answer 1

Explanation:

As the supply of loans increases, the cost of loans--that is, the interest rate--decreases. Thus, a low price level induces consumers to save, which in turn drives down the interest rate. A low interest rate increases the demand for investment as the cost of investment falls with the interest rate.