The aggregate demand curve is negatively sloped because of the:
A) substitution effect of an aggregate price level change.
B) wealth effect of an aggregate price level change.
C) elasticity effect of an aggregate price level change.
D) fiscal policy effect.

Question

Quizplus · Accepted Answer

The wealth effect explains why the aggregate demand curve is negatively sloped. When the aggregate price level increases, the purchasing power of households and firms decreases, causing a decrease in consumption and investment expenditures, leading to a decrease in real GDP demanded. This response to changes in the aggregate price level is known as the wealth effect.

The Aggregate Demand Curve Is Negatively Sloped Because of The