The aggregate demand curve slopes downward because of

Question

Quizplus · Accepted Answer

The wealth effect of a decrease in price level increases real wealth, leading to an increase in consumption expenditure as well as aggregate demand. The substitution effect of a decrease in price level makes foreign goods more expensive and domestic goods relatively cheaper, causing an increase in net exports, which also increases aggregate demand. Both effects lead to a downward slope of the aggregate demand curve. The multiplier, MPC, import, or taxation effects relate to specific mechanisms that affect the magnitude or shape of the aggregate demand curve but not its slope.

The Aggregate Demand Curve Slopes Downward Because of