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There are three basic reasons why the aggregate demand curve slopes
downwards from left to right:
• The wealth effect: rising prices reduce the real value of money balances and income held by consumers. There is a reduction in purchasing power
• The interest rate effect: rising prices increase the demand for money. This pushes up the rate of interest and reduces interest rate sensitive expenditure, especially investment. The rise in the rate of interest may have the further impact of increasing the value of the pound and reducing the net export component of aggregate demand
• International substitution: a rise in the price of UK goods will lead consumers at home and abroad to switch away from UK produced goods. There is likely to be a rise in imports and a fall in exports, causing a fall in the net exports component of aggregate demand.
lydiajane74 answered the question on July 4, 2018 at 08:13
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