Answer to Question #237230 in Macroeconomics for Calista

Question

Discuss one reason for the downward sloping aggregate demand curve.

Please may I have a detailed solution.

Answer 1

One reason for the downward sloping aggregate demand curve is Pigou's wealth effect.

Since normal value of money is fixed while real value is dependent upon the price level.

For instance for a given amount of money, a lower price level provides more purchasing power per unit of currency. Incase where price level decrease, consumers are wealthier, a reason which makes consumers to spend more.

Hence, a drop in the price level makes consumers to spend more, therefore increasing the aggregate demand.