The aggregate demand (AD) curve slopes downward to the right because: a) as pric

Question

The aggregate demand (AD) curve slopes downward to the right because:

a) as prices decrease, the real value of the fixed quantity of money increases and thereby stimulates consumer spending (the real balance effect)

b) a lower price level reduces the price of domestic goods relative to foreign goods, increasing net exports (the international substitution effect)

c) a lower price level reduces the demand for money and lowers the real interest rate, stimulating consumption and investment spending (the interest rate effect)

d) all of the above are correct

Explanation / Answer

Answer:- Option d) All of the above are correct.

Explanation:- The aggregate demand (AD) curve slopes downward to the right because of the following three reasons:-

i) The Real balance effect (reflected in option a)

ii) The international substitution effect (reflected in option b)

iii) The interest rate effect (reflected in option c)

Conclusion:- Option d) i.e., all of the above options (a,b and c) are correct reasons for AD curve sloping downward to the right.

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