Question

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for Group of answer choices the slope of short-run aggregate supply the slope of long-run aggregate supply the slope of the aggregate-demand curve everything that makes the aggregate-demand curve shift

Answer 1

Answer:

The correct answer is: the slope of the aggregate-demand curve.

Explanation:

The aggregate demand comprises consumption spending, investment expenditure, government purchases, and net exports. The aggregate demand curve is a downward-sloping curve indicating that the aggregate demand will be higher at lower prices.  

The aggregate demand curve is downward sloping because of the wealth effect, interest-rate effect and exchange rate effect.  

When the price level decreases, the real value of wealth held by individuals will increase. This will cause consumer spending and hence aggregate demand to increase. This is called the wealth effect.

At lower price levels, the demand for money will also be lower as less money will be required to pay in exchange for goods and services. This decrease in the demand for money will shift the money demand curve to the left decreasing the interest rate. At lower interest rate investment expenditure will be higher. This will cause the aggregate demand to increase, this is called the interest-rate effect.  

A decrease in price will make goods cheaper for foreign consumers as well as domestic consumers. So at a lower price, the exports will be higher and the imports will be lower. The net exports will thus increase.  This will further increase aggregate demand. This is called the exchange rate effect.