Question

Match the cause for the negatively sloped aggregate demand curve with the correct term from the options.

1. As prices rise, the cost for businesses to finance new equipment increases, causing a drop in quantity demanded of real GDP.

2.The purchasing power of money held in savings accounts falls as prices rise.

3. As prices rise in the U.S., foreigners purchase fewer U.S. goods.

OPTIONS:

a.The Aggregate Demand Effect

b. The Wealth Effect

c. The Interest Rate Effect

d. The Export Effect

Answer 1

Answer: 1. c. The Interest Rate Effect

2. b. The Wealth Effect

3. d. The Export Effect

Explanation:

1. When prices rise, the interest rate has to adjust to this by rising as well and once that happens that means borrowing becomes more expensive. Companies will therefore buy less of equipment which had required that they seek leverage as it will be expensive to them thus reducing their production capacity.

2. The Wealth effect posits that people buy more when they feel they have more. The means that as prices rise and purchasing power of people's money reduces, they will feel they have less and therefore buy less.

3. The Export Effect is a situation where the prices of a Country's goods have risen. The is not necessarily good because people will buy less of that country's goods and buy more of other countrys' goods who's prices haven't increased.