Question

The aggregate demand curve is downward sloping because

A) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment spending.

B) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment spending.

C)a higher inflation rate causes the real interest rate to rise, and stimulates planned investment spending.

D) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending.

Answer 1

Ans: a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending.

Explanation:

AD = C + I + G + NX

Where, C = Consumption spending

              I = Investment spending

              G = Government spending

              NX = Net export

The AD curve shows the relationship between the general price level and the aggregate quantity of goods and services demanded.

Keeping the nominal quantity of money constant, a lower inflation rate (i.e., a decrease in price level) will lead to a larger quantity of money in real terms. It will cause the interest rate to fall, and stimulates planned investment spending.

Thus, option [D] is correct answer.