Final answer:
The aggregate demand schedule is downward sloping because of the real-balances effect, the interest-rate effect, and the foreign purchases effect. All of these contribute to reduced consumption, investment, and net exports respectively as price levels rise. Therefore, the correct answer is D. all of these.
Step-by-step explanation:
The aggregate demand schedule is downward sloping due to three primary effects:
- The real-balances effect: When the price level increases, the real value of money decreases, leading to lower purchasing power and thus reduced consumption.
- The interest-rate effect: Higher prices lead to an increased demand for money. This drives up interest rates, subsequently decreasing investment spending due to higher borrowing costs.
- The foreign purchases effect: An increase in domestic price levels makes local goods more expensive relative to foreign goods, which decreases exports and increases imports.
Therefore, the correct answer is D. all of these.
Controversy Among Economists
It's noteworthy that the magnitude of these effects is a point of debate among economists; despite this, the current model of the aggregate demand curve reflects all three reasons for its downward slope, signaling that increased price levels can universally reduce aggregate demand, even if the magnitude of this effect is not very large.