Question

    The Aggregate Demand (AD) curve slopes downward due to

    various reasons . Identify the correct set of reasons from the following options:
    A Wealth Effect, Interest Rate Effect, Exchange Rate Effect Correct Answer Incorrect Answer
    B Income Effect, Substitution Effect, Price Elasticity Effect Correct Answer Incorrect Answer
    C Law of Diminishing Marginal Utility, Taxation Effect, Inflation Expectation Effect Correct Answer Incorrect Answer
    D Monetary Policy Transmission Effect, Phillips Curve Effect, Wage Stickiness Effect Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Explanation:  

    • Wealth Effect: When price levels drop, purchasing power increases, encouraging more consumption.  
    • Interest Rate Effect: Lower price levels reduce interest rates, stimulating investment and demand.  
    • Exchange Rate Effect: When domestic prices fall, exports become cheaper, increasing net exports and boosting aggregate demand.  

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