Question

Which of the following is a correct explanation for why the aggregate demand curve slopes​ downward?

A. As the price level decreases​, exports become more expensive overseas and imports become relatively less expensive​ domestically, and thus net exports rise.
B. As the price level decreases​, the labor force increases.
C. As the price level decreases​, consumers substitute more expensive goods for less expensive choices.
D. As the price level decreases​, the real value of cash balances increases​, and total expenditures rise.

Answer 1

The correct answer is option D.

Step-by-step explanation:

As the price level decreases, the purchasing power of money increases. Or in other words, the real value of cash balances will increase.

This implies that consumers will need lesser money to purchase more goods and services. As a result, the total expenditure will increase.

An increase in the price level, on the other hand, will cause the purchasing power and real value of money balances to decrease. As a result, the total expenditure will decrease.