Which of the following best characterizes the aggregate demand curve?
A)It slopes downward because higher prices cause the exchange rate to depreciate.
B)It slopes downward because higher prices cause real wealth to decrease and interest rates to increase.
C)It slopes upward because higher prices cause people to increase their production.
D)It slopes upward because higher prices cause real wealth to increase and interest rates to decrease.

Question

Quizplus · Accepted Answer

The aggregate demand curve slopes downward because higher prices cause real wealth to decrease and interest rates to increase. As prices increase, the purchasing power of consumers' income decreases, which reduces their ability to buy goods and services. Additionally, higher interest rates make it more expensive to borrow money, which reduces consumer and business spending on consumption and investment. These factors combine to create a negative relationship between price level and aggregate demand.

Which of the Following Best Characterizes the Aggregate Demand Curve