The aggregate demand curve is
A) vertical under conditions of full employment.
B) horizontal when there is considerable unemployment in the economy.
C) downsloping because of the interest-rate, real-balances, and foreign purchases effects.
D) downsloping because production costs decrease as real output rises.

Question

Quizplus · Accepted Answer

The downward slope of the aggregate demand curve is due to three main effects - the interest-rate effect, the real-balances effect, and the foreign purchases effect. As the price level increases, people and firms need to borrow more money, causing an increase in the interest rate. This decrease in investment causes a decrease in aggregate demand. The real-balances effect happens because as the price level increases, the real value of money held by consumers decreases, causing a decrease in consumption spending. Lastly, the foreign purchases effect happens because as the price level in a country increases, foreign countries will be more likely to purchase goods from other countries, causing a decrease in net exports and aggregate demand.

The Aggregate Demand Curve Is