Why does the AD curve slope downward?

• A. Price level decreases increase real wealth and spending (wealth effect), lowers interest rates (interest rate effect), and affects net exports (foreign trade effect).
• B. Higher price levels increase real wealth and spending.
• C. The AD curve slopes downward because the money supply is fixed.
• D. Demand falls as price level falls.

Answer: (A)

The AD curve slopes downward because a lower overall price level raises real purchasing power, lowers interest rates, and makes domestic goods cheaper relative to foreign goods, all of which boost total spending. Specifically, when prices fall, people feel wealthier and spend more (wealth effect). Lower prices reduce money demand and tend to push interest rates down, encouraging households and firms to borrow and spend more (interest rate effect). At lower prices, exports become cheaper for foreigners and imports become more expensive for residents, so net exports rise and add to overall demand (foreign trade effect).

These combined channels explain why spending increases as price levels fall, producing the downward slope. The other statements don’t capture this combined mechanism: raising price levels actually reduces real wealth and spending; the idea that the slope comes from a fixed money supply isn’t the core reason; and demand does not fall when price level falls—it rises.