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explain why the aggregate demand curve slopes down?  

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armyof32000 | (Level 1) Salutatorian

Posted July 14, 2013 at 2:17 PM via web

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explain why the aggregate demand curve slopes down?

 

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sciencesolve | Teacher | (Level 3) Educator Emeritus

Posted July 14, 2013 at 4:23 PM (Answer #1)

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The demand curve relates the amount of a goods or services purchased and the price of the goods or services. This demand curve has a negative slope because it shows that the more the prices decrease, the more the demand increases, thus, a product or a service is more likely to be purchased if its price becomes cheaper.

There exists three types of effects that explain the downward sloping of the demand curve: exports effect or Mundell–Fleming effect, wealth effect or Pigou effect and interest rate effect or Keynes effect.

The net exports effect occurs when the foreign products become less expensive than domestic products, thus the demand for imports increases, while the exports decrease. Since net exports decrease and since they are a component of GDP, then, the demand curve slopes downward.

The wealth effect occurs when the power of aquisition of products and services increases as long as the prices decrease.

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