Why the AD curve slopes down Wealth effect Interest Rate Effect Net Export Effect

Wealth effect Increase P = decrease C $ buys less so consumers cut back

Interest Rate Effect Increase P = Increase IR = decrease I (and C) Consumers need more cash to pay higher prices Borrow more which increases demand for $ Save less which decreases supply of $ Consumers (and firms) don’t want to pay higher interest rates so they cut back

Net Export Effect Increase P = decrease in X and increase in M US goods are more expensive compared to foreign goods Consumers buy less domestic and more foreign X-M (net exports) decrease

Practice