Wealth Effect Drives Downward Slope of AD Curve

Steps:

• Recall aggregate demand (AD) shows total spending at different price levels.
• Identify reasons for downward slope: wealth, interest rate, and international effects.
• Evaluate choices against these standard explanations.
• Select option matching real wealth increase as prices fall.

Why D is correct:

• Lower prices raise real wealth (purchasing power of money holdings), increasing consumption per the wealth effect in Keynesian economics.

Why the others are wrong:

• A: Export demand relates to exchange rates, not directly to domestic price elasticity.
• B: Imports depend on income and relative prices, but falling domestic prices increase imports, not decrease them.
• C: Lower prices reduce interest rates via money demand, stimulating investment, not raising rates.

Final answer: D