Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. Increased consumption: Otherwise, Bernard McAlinden provides a good answer about the effect on supply of goods and services. If the demand for labor decreases, then wages will fall and labor employed falls. More Money Available, Lower Interest Rates . Since income taxes take money away from consumers, they tend to decrease aggregate demand. Recall that as the price level falls the interest rate also tends to fall. If the multiplier is 4, then a decrease in government spending of $10 million will result in a decrease in aggregate demand of $40 million, and the aggregate demand curve will shift left by $40 million. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand. The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect. Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the right. At a lower price level, interest rates usually, fall causing increased AD. 1. However, the supply of bonds increases as bond prices increase and interest rates decrease. There is more than one interest rate in an economy and even more than one interest rate on government … Government spending has a multiplier just like everything else. The Government Multiplier. 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. If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to … Contractionary monetary policy attempts to _____ aggregate demand by _____ interest rates. When interest rates are low, bond prices are high. Like many economic variables in a reasonably free-market economy, interest rates are determined by the forces of supply and demand. a. decrease increasing b. increase decreasing c. decrease decreasing d. increase increasing e. increase maintaining 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. Then, the aggregate demand curve would shift to the left. An increase in AD (shift to the right of the curve) could be caused by a variety of factors. I assume you’re asking about the supply of money. 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