The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect. Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. Graph to show increase in AD. In a market economy, all prices, even prices for present money, are coordinated by supply and demand.Some individuals have a greater demand … Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the right. Because low-interest rates cause higher bond prices and result in a lower return on investment, the demand for bonds is lower. When interest rates are low, bond prices are high. Recall that as the price level falls the interest rate also tends to fall. Shifts in the aggregate demand curve . At a lower price level, interest rates usually, fall causing increased AD. Then, the aggregate demand curve would shift to the left. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand. If the demand for labor decreases, then wages will fall and labor employed falls. If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to … Increased consumption: Interest rates does not directly affect the aggregate money supply. I assume you’re asking about the supply of money. 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. More Money Available, Lower Interest Rates . The Government Multiplier. Like many economic variables in a reasonably free-market economy, interest rates are determined by the forces of supply and demand. 1. Aggregate demand increases when the components of aggregate demand–including consumption spending, investment spending, government … 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. An increase in AD (shift to the right of the curve) could be caused by a variety of factors. However, the supply of bonds increases as bond prices increase and interest rates decrease. Contractionary monetary policy attempts to _____ aggregate demand by _____ interest rates. 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