The aggregate-demand curve slopes downward because when the price level falls: (1) consumers feel wealthier, causing them to demand more consumer goods; (2) interest rates fall, causing firms and households to demand more investment goods; and (3) the exchange rate depreciates, causing net export demand to increase.

Question

Quizplus · Accepted Answer

The aggregate-demand curve does slope downward due to the reasons mentioned in the statement. When the price levels fall, consumers feel that their money has more purchasing power, which leads to more consumption. Lower interest rates would encourage borrowing and investment, leading to a higher demand for investment goods. Finally, a decrease in the exchange rate would make exports cheaper and imports more expensive, which would increase the demand for exports, leading to an increase in net exports.

The Aggregate-Demand Curve Slopes Downward Because When the Price Level