Aggregate Demand - why is aggregate demand curve downward sloping - the Interest rate effect
3 important questions on Aggregate Demand - why is aggregate demand curve downward sloping - the Interest rate effect
Who are the two components that the interest rate effect directly affected by?
the investors: by deciding whether to borrow money
What effects does the increase in aggregate price level have of the consumer purchasing power of a given amount of money holdings? what effects does this have on the interest rates?
- an increase in aggregate price level reduces the consumer purchasing power of a given amount of money holdings
- the more money people hold the less funds available, so the interest rate increases.
How does a rise in interest rate affect effect the planned investment.
- When people hold more money the save less
- when they save less the supply of money decreases
- when the supply of money decreases the price of money, the interest rate increases.
- when the interest rate increases, the demand for money decreases and investors a not willing to invest as much
- when investment decreases aggregate expenditure decreases, and planned aggregate expenditure decreases
- when planned aggregate expenditure decreases the aggregate demand shifts to the left
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