Why is aggregate demand downward sloping?
Understand the Problem
The question is inquiring about the downward slope of the aggregate demand (AD) curve in economics, specifically why it demonstrates a negative relationship between the price level and the quantity of goods demanded. This involves concepts such as the wealth effect, interest rate effect, and the foreign exchange effect.
Answer
Wealth effect, interest rate effect, international trade effect.
The aggregate demand curve slopes downward due to the wealth effect, the interest rate effect, and the international trade effect.
Answer for screen readers
The aggregate demand curve slopes downward due to the wealth effect, the interest rate effect, and the international trade effect.
More Information
The aggregate demand curve represents the total demand for all goods and services in an economy. It is downward sloping due to three main effects: the wealth effect (lower prices increase real wealth and consumption), the interest rate effect (lower prices reduce interest rates and increase investment), and the international trade effect (lower prices make domestic goods cheaper relative to foreign goods, increasing net exports).
Sources
- Aggregate Demand Curve - open.lib.umn.edu
- Why is the aggregate demand (AD) curve downward sloping? - economicshelp.org
- Why is the AD curve downward sloping? - TutorChase - tutorchase.com
