Question

Which of the following explains why the aggregate demand curve is downward sloping?a. The interest rate effectb. The real balance effectc. The open economy effectd. All of these

Answer 1

The interest rate effect explains why the aggregate demand curve is downward sloping.

Explanation:

• The interest rate effect proposed by Keynes suggests the reasons for why is the aggregate demand curve downward sloping.
• It states that, when the interest rates are low, people choose to invest owing to the decreased costs of investment. This investment stimulates a drop in the levels of price.
• The dropped prices thus increase the aggregate demand for the commodities of which the price has dropped.