There is more than one interest rate in an economy and even more than one interest rate on government … If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to … I assume you’re asking about the supply of money. When interest rates are low, bond prices are high. Government spending has a multiplier just like everything else. Interest rates does not directly affect the aggregate money supply. The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect. Like many economic variables in a reasonably free-market economy, interest rates are determined by the forces of supply and demand. Recall that as the price level falls the interest rate also tends to fall. At a lower price level, interest rates usually, fall causing increased AD. Otherwise, Bernard McAlinden provides a good answer about the effect on supply of goods and services. Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the right. If the demand for labor decreases, then wages will fall and labor employed falls. For instance, you had to pay 10 percent more in income taxes this year than you did last year, but your total income stayed the same, you have less money left over to spend on things like entertainment, clothes, eating out and travel. a. decrease increasing b. increase decreasing c. decrease decreasing d. increase increasing e. increase maintaining Then, the aggregate demand curve would shift to the left. The ‘natural rate of unemployment’ is the rate of unemployment at equilibrium, at this rate wages are in equilibrium, and aggregate demand and aggregate supply are also in balance. At a lower price level, exports are relatively more competitive than imports. Graph to show increase in AD. Contractionary monetary policy attempts to _____ aggregate demand by _____ interest rates. However, the supply of bonds increases as bond prices increase and interest rates decrease. Because low-interest rates cause higher bond prices and result in a lower return on investment, the demand for bonds is lower. The Government Multiplier. 1. Increased consumption: Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand. In a market economy, all prices, even prices for present money, are coordinated by supply and demand.Some individuals have a greater demand … Shifts in the aggregate demand curve . An increase in AD (shift to the right of the curve) could be caused by a variety of factors. More Money Available, Lower Interest Rates . 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