The aggregate demand curve slopes downward because of
A) wealth and substitution effects.
B) the multiplier.
C) import and taxation effects.
D) the MPC.

Question

Quizplus · Accepted Answer

The downward slope of the aggregate demand curve is due to the wealth and substitution effects. The wealth effect refers to the fact that as the price level falls, the real value of household wealth increases, leading to higher consumption and increased demand. The substitution effect happens when a fall in the price level makes domestic goods relatively cheaper compared to foreign goods, leading to an increase in exports and net exports, thus boosting aggregate demand. The other options - the multiplier, import and taxation effects, and the MPC - are all important factors in determining the level of aggregate demand, but they do not directly explain the downward slope of the curve.

The Aggregate Demand Curve Slopes Downward Because of