Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 33 - Part XII - Aggregate Demand and Aggregate Supply - Questions for Review: 3

Answer

The aggregate demand curve slops downwards because fall in price levels make consumers feel greater purchasing power parity so they spend more and there is larger quantity demanded. Lower price levels reduces the interest rate and this causes greater investment spending. Decline in price levels will cause interest rates to fall then the exchange rate depreciates and this causes greater exports.

Work Step by Step

Understanding this requires knowledge on a global context and how the interactions of other countries through trade explains the graph of aggregate demand and supply.
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