Question

The Aggreagate Demand (AD) curve is downward sloping becuase, other things constant, an increase in the price level induces people to hold

	a.	more money, so they save more in banks, and the interest rate falls.
	b.	more money, so they save less in banks, and the interest rate rises.
	c.	less money, so they save less in banks, and the interest rate rises.
	d.	less money, so they save more in banks, and the interest rate falls.

Answer 1

Answer) The Aggregate Demand (AD) curve is downward sloping because, other things constant, an increase in the price level induces people to hold more money, so they save more in banks, and the interest rate falls. A high price level means that it takes a moderately large amount of currency to make purchases. Thus, consumers demand substantial quantities of currency when the price level is high. When the price level is low, consumers demand a somewhat lesser amount of currency because it takes a somewhat small amount of currency to make purchases. Thus, consumers keep larger proportions of currency in the bank. As the amount of currency in banks increases, the supply of loans rises. As the supply of loans increases the rate decrease.

Hence option A is the correct answer.

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