An increase in the interest rate causes the aggregate _____ curve to shift _____.

• A. supply; to the left
• B. demand; to the right
• C. supply; to the right
• D. demand; to the left

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the components of the aggregate demand and aggregate supply model. Aggregate demand (AD) represents the total quantity of goods and services demanded across all levels of an economy at a given overall price level and in a given period, while aggregate supply (AS) represents the total quantity of goods and services that producers are willing and able to supply at a given price level.
2. Step 2: Recognize how interest rates affect aggregate demand. An increase in interest rates typically raises the cost of borrowing, which tends to reduce consumption and investment spending by households and firms.
3. Step 3: Analyze the effect of higher interest rates on aggregate demand. Since consumption and investment are components of aggregate demand, higher interest rates lead to a decrease in aggregate demand, causing the aggregate demand curve to shift.
4. Step 4: Determine the direction of the shift. A decrease in aggregate demand means the aggregate demand curve shifts to the left, indicating a lower quantity of goods and services demanded at each price level.
5. Step 5: Confirm that aggregate supply is not directly affected by interest rate changes in this context, so the correct description is that an increase in interest rates causes the aggregate demand curve to shift to the left.