The wealth effect, interest-rate effect, and exchange-rate effect all help explain why the aggregate demand curve is downward sl
oping. Phyllis, a fellow student in your AP Macro class, suggests that the substitution effect that you learned about in Unit 1 also explains why aggregate demand curve is downward sloping. She reasons that since it explains why a market demand curve is downward sloping, it must also be valid for aggregate demand. Explain why Phyllis is wrong.
The aggregate demand curve is downward sloping. It implies price levels are falling and the quantity of output will increase as well as the domestic income. The theories that can explain why the aggregate demand curve is downward sloping: the Pigou's wealth effect, the Keynes's interest-rate effect, and the and Mundell-Fleming's exchange-rate effect.
Unilateral Contract — a contract in which only one party makes an enforceable promise. Most insurance policies are unilateral contracts in that only the insurer makes a legally enforceable promise to pay covered claims.
