Question

Which effect best explains the downward slope of the aggregate demand curve? multiple choice

a. a multiplier effect
b. a substitution effect
c. a real-balances effect
d. an income effect

Answer 1

The downward-sloping aggregate demand curve is explained by the wealth effect, interest rate effect, and foreign price effect.

Step-by-step explanation:

The downward-sloping aggregate demand (AD) curve shows the relationship between the price level for outputs and the quantity of total spending in the economy.

It slopes down because of: (a) the wealth effect, which means that a higher price level leads to lower real wealth, which reduces the level of consumption; (b) the interest rate effect, which holds that a higher price level will mean a greater demand for money, which will tend to drive up interest rates and reduce investment spending;

and (c) the foreign price effect, which holds that a rise in the price level will make domestic goods relatively more expensive, discouraging exports and