When the price level declines the interest rate falls, and consumers borrow more funds, which causes a movement down along the aggregate demand curve. interest rates fall, and consumers borrow more funds, which causes the aggregate demand curve to shift to the left. the interest rate rises, and consumers borrow fewer funds, which causes a movement up the aggregate demand curve. the interest rate is not affected, so there is no movement along the aggregate demand curve.

Question

Fatty

Business

19 May, 19:20

When the price level declines the interest rate falls, and consumers borrow more funds, which causes a movement down along the aggregate demand curve. interest rates fall, and consumers borrow more funds, which causes the aggregate demand curve to shift to the left. the interest rate rises, and consumers borrow fewer funds, which causes a movement up the aggregate demand curve. the interest rate is not affected, so there is no movement along the aggregate demand curve.

+1

Answers (1)

Know the Answer?

Johnny Wang · Answer 1

Interest rates fall, and consumers borrow more funds, which causes the aggregate demand curve to shift to the left.

Explanation:

The quantity of money demanded is inversely related to the interest rate. One of the most useful features of the liquidity preference framework is that it allows us to see how changes in the demand and supply of money affect interest rates.

Equilibrium interest rates will increase if there is a ...

Increase in money demand (+)

Decrease in money supply (+)

Equilibrium interest rates will decrease if there is a ...

Decrease in money demand (-)

Increase in money supply (-)

A lower price level has the opposite affect inducing a decrease in the interest rate which triggers an increase in borrowing used for consumption expenditures and investment expenditures. The negative slope of the aggregate demand curve captures the inverse relation between the price level and aggregate expenditures on real production. When the price level changes, the interest-rate effect is activated, which is what then results in a change in aggregate expenditures and the movement long the aggregate demand curve. A higher interest rate can add to the overall cost of the expenditure. A lower interest rate can reduce the overall cost of the expenditure.

This means that changes in the interest rate can have a big impact on consumption and investment spending. The interest rate tends to increase and decrease as the price level increases and decreases. This means that a higher price level induces a higher interest rate which raises the cost of borrowing and discourages investment and consumption spending. A lower price level has the opposite result.