Which of the following explains why the aggregate demand curve is downward sloping?
A) the interest rate effect
B) the real-balance effect
C) the open economy effect
D) all of the above

Question

Quizplus · Accepted Answer

The aggregate demand curve is downward sloping due to all three effects: 
1) the interest rate effect - as prices decrease, interest rates decrease, which leads to an increase in consumption and investment spending; 
2) the real-balance effect - as prices decrease, the real value of people's wealth increases, which leads to an increase in consumption spending; 
3) the open economy effect - as prices decrease, net exports increase, which leads to an increase in aggregate demand.

Which of the Following Explains Why the Aggregate Demand Curve