Net Exports Effect in Aggregate Demand

Steps:

• Aggregate demand (AD) slopes downward because lower price levels increase quantity demanded through wealth, interest rate, and net exports effects.
• A fall in domestic prices reduces the relative cost of the country's goods abroad.
• This boosts export demand while imports become relatively more expensive, decreasing them.
• Higher net exports increase total AD, explaining the downward slope.

Why C is correct:

• In the AD-AS model, the net exports effect states that lower domestic prices improve trade competitiveness, raising exports and net exports per the formula NX = Exports - Imports.

Why the others are wrong:

• A: Describes the interest rate effect, where lower prices increase real money supply and reduce rates to boost investment.
• B: Refers to the wealth effect, where higher real money balances encourage consumption.
• D: Expectations of falling prices would delay purchases, reducing current AD and shifting the curve leftward.

Final answer: C