Question

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

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.