1. Real-Balances Effect
2. Household Expectations
3. Interest-Rate Effect
4. Personal Income Tax Rates
5. Proﬁt Expectations
6. National Incomes Abroad
7. Government Spending
8. Foreign Purchases Effect
9. Exchange Rates
10. Degree of Excess Capacity
Answer the question based on the accompanying list of factors that are related to the aggregate
demand curve. Which of the factors best explain the downward slope of aggregate demand curve?
A) 2, 4, and 6
B) 7, 9, and 10
C) 1, 3, and 8
D) 4, 6, and 7

Question

1. Real-Balances Effect 
2. Household Expectations
3. Interest-Rate Effect
4. Personal Income Tax Rates
5. Proﬁt Expectations
6. National Incomes Abroad
7. Government Spending
8. Foreign Purchases Effect
9. Exchange Rates 
10. Degree of Excess Capacity
Answer the question based on the accompanying list of factors that are related to the aggregate
demand curve. Which of the factors best explain the downward slope of aggregate demand curve?
A) 2, 4, and 6
B) 7, 9, and 10
C) 1, 3, and 8
D) 4, 6, and 7

Quizplus · Accepted Answer

The Real-Balances Effect (1) and Interest-Rate Effect (3) explain the negative slope of the aggregate demand curve, but they are not the best choices because they only address the impact of changes in price levels and interest rates, respectively. The best choice is C because it includes factors that affect both domestic and foreign demand for goods and services, such as Personal Income Tax Rates (4), Foreign Purchases Effect (8), and Exchange Rates (9), as well as factors that affect the level of economic activity and output, such as Household Expectations (2) and Degree of Excess Capacity (10). The other factors (6 and 7) may also affect aggregate demand, but they are not as relevant or significant as the ones in choice C.