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The slope of the aggregate demand curve is determined: a/only by the sensitivity of the IS...

The slope of the aggregate demand curve is determined:

a/only by the sensitivity of the IS curve, or short-run output, to the real interest rate.

b/only by the sensitivity of short-run output to the inflation rate.

c/by the sensitivity of short-run output to both inflation and the real interest rate.c/only by the sensitivity of short-run output to the inflation target.

d/by the sensitivity of short-run output to the real interest rate and by the central bank sensitivity to inflation.

e/by the sensitivity of short-run output to both inflation and the real interest rate.

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Answer #1

Solution: by the sensitivity of short-run output to the real interest rate and by the central bank sensitivity to inflation

Explanation: The AD curve is downward sloping due to the interest-rate effect, the real-balance effect, and the foreign purchases effect. The central bank with the monetary policy has the ability to set the real rate of interest in the short run. The sensitivity of output to the real interest rate impact in short-run determine the slope of the aggregate demand curve

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