2 . Why the aggregate demand curve slopes downward

The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $300 billion, and the price level is 140. Moving down along the AD curve from point X to point Y, the quantity of output demanded rises to $500 billion, and the price level falls to 120.

010020030040050060070080017016015014013012011010090PRICE LEVELOUTPUT (Billions of dollars)ADXY

As the price level falls, the purchasing power of households' real wealth will , causing the quantity of output demanded to . This phenomenon is known as the effect.

Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore , and the number of foreign products purchased by domestic consumers and firms (imports) will . Net exports will therefore , causing the quantity of domestic output demanded to . This phenomenon is known as the effect.