Final answer:
The demand for money curve is downward sloping due to the wealth effect, interest rate effect, and foreign price effect.
Step-by-step explanation:
The demand for money curve is downward sloping due to several factors:
- Wealth effect: A higher price level reduces the real wealth of individuals, leading to a decrease in consumption. As a result, people hold less money.
- Interest rate effect: A higher price level increases the demand for money, which in turn drives up interest rates. Higher interest rates reduce investment spending and decrease the quantity of money demanded.
- Foreign price effect: When the price level rises, domestic goods become relatively more expensive. This discourages exports and increases imports, leading to a decrease in the demand for money.
These factors collectively shape the downward slope of the demand for money curve.