Final answer:
The slope of the aggregate demand curve is influenced by the wealth effect, the interest rate effect, and the foreign price effect, all contributing to its downward direction, making the correct answer (e) I, II, and III.
Step-by-step explanation:
The slope of the aggregate demand curve can be explained by several key economic effects. Among these, the wealth effect (I), the interest rate effect (II), and the foreign price effect (also known as the exchange-rate effect) (III), are primary reasons for its downward slope. When considering the options provided, it is essential to correct the terminology from 'production-substitution effect' to 'foreign price effect'.
The wealth effect posits that a higher aggregate price level results in lower real wealth, thereby reducing consumption. The interest rate effect suggests that higher prices increase the demand for money, leading to higher interest rates, which in turn, can dampen investment spending. Finally, the foreign price effect implies that an increase in the price level makes domestic goods relatively more expensive, reducing exports and boosting imports.
Therefore, the correct response, given the proper recognition of the foreign price effect, is (e) I, II, and III, indicating that all three effects contribute to the downward slope of the aggregate demand curve.