Why is the AD curve downward-sloping?
A)Because production costs decline as Real GDP increases.
B)Because higher prices cause an increase in real balances which increases spending.
C)Because lower prices cause an increase in real balances which increase spending.
D)Because lower prices cause interest rates to increase which increases spending.

Question

Quizplus · Accepted Answer

The AD curve is downward-sloping because lower prices (inflation) mean that each unit of currency can buy more goods and services, increasing real balances. This increase in real balances leads to an increase in spending, which in turn leads to an increase in Real GDP. Therefore, as the price level decreases, Real GDP increases, and vice versa.

Why Is the AD Curve Downward-Sloping