The negative slope of the aggregate demand curve is caused by:
A) the real balances effect, the interest rate effect, and the price level effect.
B) the real balances effect, the money supply effect, and the net exports effect.
C) the interest rate effect, the net exports effect, and the real GDP effect.
D) the real balances effect, the interest rate effect, and the net exports effect.
E) the real balances effect, the interest rate effect, and the net export effect.

Question

Quizplus · Accepted Answer

The negative slope of the aggregate demand curve is caused by the real balances effect, the interest rate effect, and the net exports effect. The real balances effect suggests that as the price level increases, the purchasing power of individuals' wealth decreases, reducing their real money balances and ultimately decreasing their consumption spending. The interest rate effect suggests that as the price level increases, there is an increased demand for money, which drives up interest rates and ultimately decreases investment spending. Finally, the net exports effect suggests that as the price level increases, domestic goods become relatively more expensive, reducing net exports and ultimately decreasing aggregate demand.

The Negative Slope of the Aggregate Demand Curve Is Caused