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What would be the shape of the Ap demand function if a change in interest rates...

What would be the shape of the Ap demand function if a change in interest rates by the Fed resulted in no change in planned autonomous spending? Explain.

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Answer #1

When change in interest rate doesn't change in planned Autonomous spending ( investment especially).Then shape of aggregate demand will be vertical straight line.

Aggregate demand shows relationship between price and aggregate demand.

Change in price , change real money supply and thus change interest rate.

And change in interest rate change autonomous spending and thus change aggregate demand.

If if there is no effect of interest rate on aggregate demand,then change in price also doesn't affect aggregate demand,so aggregate demand would be vertical straight line, showing no effect of price on aggregate demand.

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