Question

Why does the aggregate demand curve slope​ downward? The aggregate demand curve slopes downward because​ _______. A. of the wealth effect and the price level effect B. as the price level​ falls, expected future income increases C. as the price level​ falls, expected future profits increase D. of the wealth effect and the substitution effect

Answer 1

Answer:

The correct answer is option D.

Explanation:

The aggregate demand curve slopes downward showing a negative relationship between the price level and demand.

When there is increase in price level,as a result the purchasing power of the consumer will decline. This further causes the aggregate demand to fall. This is also termed as the wealth effect.

When there is an increase in the price level, the rational consumers will prefer the cheaper substitute. so the demand for that commodity will decline. This is the substitution effect.