{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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 
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}