This Question: 1 pt 1 of 40 (0 complete) This Quiz: 40 pts possible Which of the

Question

This Question: 1 pt 1 of 40 (0 complete) This Quiz: 40 pts possible Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to 0 A. decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward. shifing the Mo curve upward, raising the interest rate and B. increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to O C. decrease, shifting the M curve upward, raising the interest rate and increasing desired investment, causing the AE curve to 0 D. increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward. shift upward. shift downward. 0 E. increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward.

Explanation / Answer

(1) Option (A)

As price level falls, transactions demand for money is lower, shifting MD curve down, causing interest rate to fall and investment demand to rise. This leads to upward shift of AE curve.

(2) Option (C)

Total expansion in money = $1 / 10% = $1 / 0.1 = $10

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