Question

Give and briefly explain the 3 reasons as to why the Aggregate Demand curve has a downward slope:

1.

2.

3.

Answer 1

The three main reasons for the demand slope of aggregate demand curve are:-

1. Lower interest rates also known as Keynes rate effect.

2. Increase spending power also known as pigou's wealth effect.

3. Increased demand for exports also known as mundell flemming's exchange rate effect.

1. Lower interest rates:-

• When the price level is high,demand for money increases and when the price level is low demand for money decreases.
• With the increase in amount of money the price level decreases and which will decrease the interest rates and their by increases the aggregate demand.

2. Increase spending power:-

When the price level is lower in the Economy, the purchasing power of the currency increases.this Increases the consumer spending in the Economy which in turn increases the aggregate demand.

3. Increased demand for exports:-

When the price level of a country falls, the domestic goods will become more competitive and the number of exports will increase which will lead to the increase in aggregate demand.