Question

The quantity of aggregate goods and services demanded rises when the

a. price level rises, because the interest rate falls. b. price level falls, because the interest rate falls. c. price level falls, because the interest rate rises. d. price level rises, because the interest rate rises.

Answer 1

As Aggregate expenditure basically is a sum of consumption , investment , government expenditure and net exports .

So AE = C + I + G + NX

So if the Aggregate good and services rise , then AE will rise , which lead to rightward shift is IS curve in ISLM model, rightward shift is IS curve lead to fall in the interest rate . Further increase in IS curve will lead to rightward shift of the Aggregate demand ( AD ) curve in AD AS model which will lead to rise in prices .

So as the quantity of aggregate goods and services demanded rises , interest rate will fall and price will rise.

Hence ( A ) part is a correct answer