Question

The aggregate demand (ad) curve is downward sloping because:

1) a reduction in p will cause an increase in the real wage, a reduction in employment, and a reduction in output.
2) a reduction in the money supply (m) will cause an increase in the interest rate, a reduction in investment, and a reduction in output.
3) a reduction in the aggregate price level (p) will cause a reduction in the interest rate and a decreasein output.
4) an increase in the nominal wage causes a reduction in the amount of output that firms are willing to produce.
5) none of the answers are correct

Answer 1

The aggregate demand (AD) curve is downward sloping due to the wealth effect, interest rate effect, and foreign price effect.

Step-by-step explanation:

The aggregate demand (AD) curve is downward sloping because of three main reasons:

1. The wealth effect: When the price level (p) decreases, the real value of money increases, which leads to an increase in consumption. This results in higher aggregate demand and output.
2. The interest rate effect: When the price level decreases, the demand for money decreases. This reduces interest rates, leading to increased investment spending and higher output.
3. The foreign price effect: When the price level decreases, domestic goods become relatively cheaper compared to foreign goods, boosting exports and increasing aggregate demand.