Homework Answers
Since the AD curve is downward sloping, so it shows negative relationship between price and real GDP.
AD=C+I+G+X-M
When interest rate decrease, this leads to an increase in the investment because now borrowing has become cheaper. So the investment will increase. Since investment is part of AD. Hence AD will increase, as a result, AD curve shifts rightward. Hence there will be an increase in the output demand.
Hence option fourth is the correct answer.
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