Answer to Question #231116 in Macroeconomics for Tiyoo

Question

list and explain 2 reasons why the AD curve has a negative slope

Answer 1

Interest rate effects

This is where consumer consumption is encouraged by lower prices. However, an increase in the number of goods purchased still leaves the consumers with hire disposal income, increasing expenditure and savings. The increase in consumer saving increases the supply of loanable funds, decreasing the real interest rate thus increase in the level of investment in the economy. A decrease in the price level leads to an increase in aggregate demand.

The Exchange-Rate Effect

For the purchase of foreign assets, people need to exchange their dollars for foreign currency. The forces of supply and demand determine the price of the currency. An increase in demand for foreign currency increases the price of foreign currency, decreasing the domestic price level, increasing the number of exports, decreasing the number of imports, and increasing net exports. Exports are a component of AD; therefore, AD will be increased