The aggregate demand curve showsResponsesA the positive relationship between spending and interest rates.the positive relationship between spending and interest rates.B the negative relationship between real GDP and interest rates.the negative relationship between real GDP and interest rates.C the positive relationship between spending and the price level.the positive relationship between spending and the price level.D the negative relationship between real GDP and inflation.
Question
The aggregate demand curve showsResponsesA the positive relationship between spending and interest rates.the positive relationship between spending and interest rates.B the negative relationship between real GDP and interest rates.the negative relationship between real GDP and interest rates.C the positive relationship between spending and the price level.the positive relationship between spending and the price level.D the negative relationship between real GDP and inflation.
Solution
The aggregate demand curve shows the negative relationship between real GDP and interest rates. So, the correct answer is B.
Here's why:
Aggregate demand is the total demand for all goods and services in an economy. This demand is comprised of the spending by households, businesses, the government, and foreign entities.
When interest rates are high, borrowing costs increase. This discourages businesses from investing and consumers from spending, which leads to a decrease in aggregate demand. Conversely, when interest rates are low, borrowing costs decrease. This encourages businesses to invest and consumers to spend, leading to an increase in aggregate demand.
Therefore, the aggregate demand curve shows a negative relationship between real GDP and interest rates: as interest rates increase, real GDP (or aggregate demand) decreases, and vice versa.
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