The three reasons why the aggregate demand curve slopes downward are
A) the international substitution effect, the net exports effect and the interest rate effect.
B) the interest rate effect, the short run effect and the free rider effect
C) the net exports effect, the real balance effect and the short run effect
D) the real balance effect, the international substitution effect and the interest rate effect.

Question

Quizplus · Accepted Answer

The three reasons why the aggregate demand curve slopes downward are the real balance effect, the international substitution effect, and the interest rate effect. The real balance effect states that a decrease in prices increases the value of money, which in turn increases consumption and investment. The international substitution effect states that a decrease in prices makes domestic goods more attractive compared to foreign goods, which increases net exports. The interest rate effect states that a decrease in prices decreases the demand for money, which in turn decreases interest rates and increases investment and consumption.

The Three Reasons Why the Aggregate Demand Curve Slopes Downward