The AD-curve has a negative slope since
A)firms will produce less if they have to lower their prices
B)lower prices mean higher real wages so firms can no longer afford to produce as many goods and services
C)a decrease in the price level increases real money balances, leading to lower interest rates and increased spending
D)lower prices drive up the demand for goods since buyers fear future market shortages
E)lower prices increase consumer confidence, which encourages spending

Question

Quizplus · Accepted Answer

A decrease in the price level increases real money balances, which typically leads to lower interest rates. Lower interest rates make borrowing cheaper, encouraging both consumers and businesses to spend more, which in turn increases the demand for goods and services. This mechanism explains why the aggregate demand (AD) curve has a negative slope: as the price level falls, the quantity of goods and services demanded increases.

The AD-Curve Has a Negative Slope Since