The AD curve slopes
A) downward due to the wealth and substitution effects.
B) upward due to the wealth and substitution effects.
C) upward due to the price and substitution effects.
D) downward due to the wealth and price effects.

Question

Quizplus · Accepted Answer

The AD curve slopes downward due to both the wealth effect and the substitution effect. The wealth effect refers to the fact that as the overall price level increases, the real value of assets and income declines, leading to a decrease in consumer spending. The substitution effect refers to the fact that as some goods and services become relatively more expensive due to inflation, consumers will substitute toward relatively cheaper alternatives, leading to a decrease in overall spending.

The AD Curve Slopes