Why does the aggregate demand curve slope downward?

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Why does the aggregate demand curve slope downward?



GDP = OUTPUT = NATIONAL EXPENDITURE = C + I + G +NX:


1) CONSUMPTION (C):

Changes in price level will change the REAL value of people's wealth and income → increase in overall prices, reduce people's wealth, in terms of real purchasing power. → When people are less wealthy, they consume less creating a NEGATIVE RELATIONSHIP BETWEEN consumption and overall price level → wealth effect. NOTE: if wages increase the same amount as prices does, the purchasing power of those wages stay the same.


2) INVESTMENT (I): when prices rise, the interest rate (price or borrowing) rises too. Higher interest rates leads to less investments. → increase in borrow costs create an INDIRECT negative relationship between the price level and investment spending.


3) GOVERNMENT SPENDING: The government has NO EFFECT on the negative slopping of the demand curve.


4) NET EXPORTS: When the prices in the US increase, goods become relatively more expensive than goods from other countries, assuming that price levels stay the same in other countries. → Negative relationship between the price level and net exports.

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