Why Does the Aggregate Demand Curve Slope Downward?
The real balance effect, the interest rate effect, and the international trade effect explain the inverse relationship between the price level and the quantity demanded of Real GDP. The real balance effect states that the inverse relationship is established through changes in the value of monetary wealth. As the price level changes, the purchasing power of monetary wealth changes, causing the quantity demanded of Real GDP to change. The interest rate effect states that the inverse relationship is established through changes in household and business spending that is sensitive to interest rate changes. As the price level changes, it takes a different quantity of money to purchase a fixed bundle of goods, and this leads to a change in savings (the supply of credit increases). Subsequently, the price of credit, which is the interest rate, changes, causing households and businesses to change their borrowing levels, and changing the quantity of Real GDP to change. The international trade ef
