Question

What are the economic reasons why the AD curve slopes down?

Short answer

There are various reasons why the AD curve slopes down.

Step-by-step solution

Step 1. Definition

Aggregate demand is the demand for all the finished goods and services in the economy.

There are four components of the AD (aggregate demand) curve i.e., consumption, investment, government spending, and net exports.

Step 2. Explanation

There are various reasons why the AD curve slopes downward which are discussed below:

1. effect of interest rate: if the level of the price is high, it means that now a high amount of currency is required to make purchases. Thus, consumers retain less amount of currency in the bank, then the currency in the bank decreases also the loans given by banks also decline that’s why the cost of loans decreases and interest rate increases. This decreases the demand for investment and in turn, this leads to a decline in AD.

2. wealth effect: it means that if you have a sufficient amount of money, then a lower price level will give you high purchasing power. Thus, a decline in a price level leads to an increase in aggregate demand.