Question

Which of the following reasons helps explain why the aggregate demand curve is downward sloping?

a. The real balances effect: Consumers spend more on goods and services when the price level falls because lower prices increase consumer purchasing power.

b. The producer-push effect: At less than full employment, increases in quantity demanded will raise price, and thus will motivate sellers to produce more.

c. The hidden inflation effect: As the price level rises, consumers fail to recognize that prices are higher, and consequently they fail to reduce expenditures on goods and services.

d. None of the answers above are correct.

Answer 1

The aggregate demand curve is downward sloping because of the real balances effect, where higher prices decrease consumer purchasing power, leading to less consumption. Additionally, the interest rate effect and foreign price effect contribute to the downward slope by influencing investment spending and trade. The correct answer is option a.

Step-by-step explanation:

The reason that helps explain why the aggregate demand curve is downward sloping is a. The real balances effect: Consumers spend more on goods and services when the price level falls because lower prices increase consumer purchasing power. This effect is part of a broader economic understanding of how the aggregate demand curve behaves. Specifically, the downward slope can be attributed to three primary reasons:

• The wealth effect, where a higher price level reduces real wealth and consumption,
• The interest rate effect, which suggests that higher prices increase demand for money, raising interest rates and decreasing investment spending,
• The foreign price effect, indicating that a higher domestic price level makes domestic goods more expensive abroad, thereby discouraging exports and encouraging imports.

These reasons explain why an increase in the price level will lead to a decrease in the aggregate quantity of goods and services demanded.