A decrease in the price level will a. increase the interest rate and involve a downward movement along the aggregate demand curve. b. decrease the interest rate and involve a downward movement along the aggregate demand curve. c. increase the interest rate and involve an upward movement along the aggregate demand curve. d. decrease the interest rate and involve an upward movement along the aggregate demand curve. e. not affect the interest rate and will involve a downward movement along the aggregate demand curve. f. not affect the interest rate and will involve an upward movement along the aggregate demand curve.

b. an decrease the interest rate and involve a downward movement along the aggregate demand curve

Explanation:

In the monetary market, Real money supply = Ms/P (P is the price level).

Initially, the market is at equilibrium point A: i = i1 (interest rate);

When there is a decrease of in the price level, (Ms/P) would increase, lead to a rise in the real money supply. So that the real money supply curve would shift to the right.

In this situation, the demand curve remains unchanged.

So that the new money supply curve would cut the demand curve at the new equilibrium at point B with i = i2

We can see that i2 < i1 and the there is a movement downward the demand curve

=> the decrease in price level leads to an decrease the interest rate and involve a downward movement along the aggregate demand curve

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