Question

As the price level declines along the aggregate demand curve, the interest rate is most likely to:___________.

a. Decline
b. Increase
c. Remain unchanged

Answer 1

a. Decline

Step-by-step explanation:

Whenever there is a reduction in the price level, this results in gains in the real money supply which eventually moves the LM curve to the right.

Hence, given that, the IS curve has a downward slope, the IS and LM curves will meet at a higher level of income and a lower interest rate.

Therefore, the correct answer, in this case, is Option A: DECLINE

Note LM means Liquidity and Money

While IS means Investment and Savings.