Answer:
The downward slope of the aggregate demand curve can be attributed to the wealth effect, interest rate effect, and the net export effect. Firstly, the wealth effect refers to the tendency of consumers to spend more as their wealth increases, and vice versa. As the price level decreases, the real value of household wealth increases, leading to increased consumer spending and aggregate demand. Secondly, the interest rate effect suggests that a decrease in the price level leads to lower interest rates, which in turn stimulates borrowing and investment, leading to an increase in aggregate demand. Lastly, the net export effect indicates that a decrease in the price level leads to a decrease in the exchange rate, making exports cheaper and imports more expensive, which increases net exports, leading to an increase in aggregate demand.
On the other hand, the upward slope of the short-run aggregate supply curve is due to the sticky-wage theory, the sticky-price theory, and the misperceptions theory. Firstly, the sticky-wage theory suggests that nominal wages are slow to adjust to changes in the price level. As the price level falls, firms' profits decrease, leading to a reduction in output and employment. However, nominal wages remain the same, causing a decrease in firms' production costs and an increase in their profits, leading to an increase in output and employment. Secondly, the sticky-price theory indicates that some firms' prices are inflexible in the short run and do not adjust immediately to changes in the price level. As the price level falls, firms' output decreases, leading to a decrease in profits. However, their production costs also decrease due to lower input prices, leading to an increase in profits and output. Lastly, the misperceptions theory suggests that firms confuse relative price changes with changes in the overall price level, leading to a change in output and employment in response to perceived changes in demand and supply conditions.
In summary, the downward slope of the aggregate demand curve can be explained by the wealth effect, interest rate effect, and net export effect, while the upward slope of the short-run aggregate supply curve can be explained by the sticky-wage theory, the sticky-price theory, and the misperceptions theory. Understanding these theories is crucial for policymakers to implement effective macroeconomic policies to stabilize the economy in the short run.