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

Question

Quizplus · Accepted Answer

The AD curve slopes downward due to the wealth and substitution effects. As the price level decreases, real wealth increases causing an increase in consumption and investment expenditures. Also, a decrease in the price level makes domestic goods more attractive relative to foreign goods, causing an increase in net exports. These two effects together lead to a downward sloping AD curve.

The AD Curve Slopes