The aggregate demand curve is downward sloping because of the
A)foreign purchases effect.
B)interest rate effect.
C)real balance effect.
D)all of the options are correct.

Question

Quizplus · Accepted Answer

The aggregate demand curve is downward sloping due to the combined effects of the foreign purchases effect, interest rate effect, and real balance effect. The foreign purchases effect occurs because as prices rise, domestic goods become relatively more expensive than foreign goods, leading to a decrease in net exports. The interest rate effect occurs because as prices rise, demand for money (to purchase goods and services) increases, leading to an increase in interest rates, which in turn reduces investment and consumption. The real balance effect occurs because as prices rise, the purchasing power of consumers' wealth decreases, leading to a decrease in consumption spending. Together, these three effects result in an inverse relationship between the price level and aggregate demand.

The Aggregate Demand Curve Is Downward Sloping Because of the