Answer to Question #294198 in Microeconomics for Alex

Question

how the interest rate works to stabilize aggregate demand in the face of autonomous changes in components of demand such as investment or government expenditure ,if the aggregate supply is perfectly inelastic.

Answer 1

As a general rule, when prices rise, demand falls because there is less of a market to purchase goods at expensive prices. By contrast, when prices fall, consumers gain more purchasing power; as a result, demand increases.