Question

Which of the following effects best explains the downward slope of the aggregate demand curve? A. A multiplier effect B. An expectations effect C. A substitution effect D. An interest-rate effect

Answer 1

Answer: An interest-rate effect

Explanation: The interest rate effect shows the fact that most consumers and business finance managers will cut back on their borrowing activities when interest rates increase. It reflect that most consumers and business managers will drastically reduce their borrowing activities when interest rates skyrocket. However, it is also known as the impact of a rise in the cost of borrowing on production costs due to price inflation within an economy