Q:

Why does the aggregate demand curve slope downward?

A:

Quick Answer

The aggregate demand curve, which illustrates the total amount of goods and services demanded in the economy at a given price level, slopes downward because of the wealth effect, the interest rate effect and the net exports effect, according to CliffsNotes.com. The curve measures the price level on the vertical axis and gross domestic product (GDP) on the horizontal axis.

Continue Reading

Full Answer

The aggregate demand curve assumes a constant money supply. When the general price level increases, purchasing power decreases as money is worth less. This causes consumers to reduce their purchases. When the price level decreases, consumers feel wealthier because their money buys more. This inverse relationship between the price level and the total consumption, as measured by GDP, contributes to the downward sloping demand curve.

The interest rate effect also contributes to the downward sloping aggregate demand curve. Given the constant money supply, the increased demand for money results in increased interest rates, which causes the sale of rate-sensitive goods to decline.

The final factor that contributes to the downward sloping aggregate demand curve is the net exports effect. Net exports are the difference between exports and imports. As the general price level increases, imported goods become less expensive relative to domestic goods, causing imports to increase. At the same time, domestic goods become more expensive to foreign buyers, causing exports to decrease. Increasing imports coupled with decreasing exports decrease net exports and contribute to the downward sloping aggregate demand curve.

Learn more about Economics

Related Questions

  • Q:

    What are characteristics of a traditional economy?

    A:

    A traditional economy is an economic system where customs, traditions and beliefs determine the goods and services created by the society. It is dependent on agriculture, hunting and gathering, fishing or any combination of the above. Also called a subsistence economy, it may involve use of barter trade instead of currency.

    Full Answer >
    Filed Under:
  • Q:

    What type of economy does Brazil have?

    A:

    Brazil's economy classifies as free market, which features an exchange of goods, services and commodities internally and with other nations. Brazil varies in degree of economic freedom; in the early 2000s, Brazil's economy classified as mostly free, then waned in status to a status of "mostly unfree" in the latter half of the decade.

    Full Answer >
    Filed Under:
  • Q:

    What is the difference between macroeconomics and microeconomics?

    A:

    According to Investopedia, microeconomics is the study of decisions made by people and businesses regarding the allocation of resources and prices of goods and services, while macroeconomics is the study of the behavior of the economy as a whole. Microeconomics focuses on individual companies, and macroeconomics looks at countries and governments.

    Full Answer >
    Filed Under:
  • Q:

    What is the basic objective of monetary policy?

    A:

    According to European Central Bank, the basic objective of monetary policy is to improve price stability and achieve a high level of employment in the economy. Monetary policy also serves as a tool to stimulate economic growth during recessions and reduce price inflation.

    Full Answer >
    Filed Under:

Explore