The aggregate demand curve slopes downward indicating that
A) an increase in the general price level will reduce the aggregate quantity of goods and services demanded.
B) an increase in the general price level will increase the aggregate quantity of goods and services demanded.
C) an increase in the interest rate will increase the aggregate quantity of goods and services demanded.
D) consumers purchase more domestic-made goods and fewer foreign-made goods as the prices of domestic goods increase.

Question

The aggregate demand curve slopes downward indicating that
A) an increase in the general price level will reduce the aggregate quantity of goods and services demanded.
B) an increase in the general price level will increase the aggregate quantity of goods and services demanded.
C) an increase in the interest rate will  increase the aggregate quantity of goods and services demanded.
D) consumers purchase more domestic-made goods and fewer foreign-made goods as  the prices of domestic goods increase.

Quizplus · Accepted Answer

The downward slope of the aggregate demand curve is due to the wealth effect, the interest rate effect, and the international trade effect. The wealth effect states that as the general price level increases, the real value of consumer wealth decreases, reducing aggregate demand. The interest rate effect states that as the general price level increases, the demand for money will also increase, raising the interest rate, which will reduce investment and consumption, leading to a decrease in aggregate demand. The international trade effect states that as the general price level increases, exports become more expensive and imports become cheaper, leading to a decrease in net exports and a decrease in aggregate demand. All of these effects contribute to the overall downward slope of the aggregate demand curve.

The Aggregate Demand Curve Slopes Downward Indicating That