The aggregate demand curve is downward sloping because

A. as income increases it causes an increase in the amount of planned expenditures.

B. an increase in the price level reduces real money holdings, which reduces the amount of expenditures.

C. a decrease in government spending reduces prices and makes consumption demand increase.

D. an increase in the price of a good causes a decrease in market demand for that good.

Question

Business

Allyson Larsen

8 July, 23:51

The aggregate demand curve is downward sloping because

A. as income increases it causes an increase in the amount of planned expenditures.

B. an increase in the price level reduces real money holdings, which reduces the amount of expenditures.

C. a decrease in government spending reduces prices and makes consumption demand increase.

D. an increase in the price of a good causes a decrease in market demand for that good.

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Answers (1)

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Rachael Warren · Answer 1

D. an increase in the price of a good causes a decrease in market demand for that good.

Explanation:

First, if prices decrease, then people will feel wealthier and consume more and the aggregate demand increases. (Pigou's effect)

Second, if interest rates decrease available domestic investors will invest in foreign countries where return (interest rates]) on investments are higher. If domestic investors invest in foreign countries the supply of dollars will increases. This will decrease the real exchange rate and then exports will be affected in a positive way; exports will increase and thus the aggregate demand.

Third, when the price level is down, consumers demand less currency, which means that they will keep more money in their bank accounts. If banks have more money, then the interest rate for loans decrease. If interest rates decrease, the cost of investment decreases too. Then, if the price for investment decreases, the demand for it increases and the aggregate demand decreases too.