The second reason for the downward slope of the aggregate demand curve is Keynes

The second reason - 's interestrateeffect. pricelevel.Thatis, .Thus,consu

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The second reason for the downward slope of the aggregate demand curve is Keynes's  interest-rate effect. Recall that the quantity of money demanded is dependent upon the  price level. That is, a high price level means that it takes a relatively large amount of  currency to make purchases. Thus, consumers demand large quantities of currency  when the price level is high. When the price level is low, consumers demand a relatively  small amount of currency because it takes a relatively small amount of currency to make  purchases. Thus, consumers keep larger amounts of currency in the bank. As the  amount of currency in banks increases, the supply of loans increases. As the supply of  loans increases, the cost of loans--that is, the interest rate--decreases. Thus, a low price  level induces consumers to save, which in turn drives down the interest rate. A low 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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The second reason - 's interestrateeffect. pricelevel.Thatis, .Thus,consu

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