Which of the following effects helps to explain the downward slope of the aggregate-demand curve?
A) the exchange-rate effect
B) the wealth effect
C) the interest-rate effect
D) All of the above are correct.

Question

Quizplus · Accepted Answer

All three effects (exchange-rate effect, wealth effect, and interest-rate effect) contribute to the downward slope of the aggregate-demand curve. The exchange-rate effect shows how a higher price level in a country decreases the demand for its exports and increases the demand for its imports, causing a decrease in net exports and thus a decrease in aggregate demand. The wealth effect describes how changes in the price level affect the real value of households' wealth, leading to changes in consumption and thus aggregate demand. The interest-rate effect shows how a higher price level increases the demand for money, leading to higher interest rates and a decrease in investment spending, thus decreasing aggregate demand.

Which of the Following Effects Helps to Explain the Downward