The wealth effect, interest rate effect, and foreign trade effect all explain why the
A) aggregate supply curve is horizontal.
B) aggregate supply curve is vertical.
C) aggregate supply curve is upward sloping.
D) aggregate demand curve is downward sloping.

Question

Quizplus · Accepted Answer

The wealth effect, interest rate effect, and foreign trade effect all explain why the aggregate demand curve is downward sloping. When an individual's wealth increases, they tend to spend more, thus increasing aggregate demand. When interest rates decrease, borrowing and spending increase, also increasing aggregate demand. Finally, when exchange rates change, it affects the price competitiveness of goods and services, influencing the demand for exports and imports, therefore affecting aggregate demand.

The Wealth Effect, Interest Rate Effect, and Foreign Trade Effect