Three reasons the aggregate-demand curve slopes downward are the wealth effect, the interest-rate

effect, and the exchange rate effect.

The wealth effect explains that when the price level decreases, each consumer is wealthier because the
real value of his or her dollar has increased. Wealthier consumers spend more, increasing the demand
for consumption goods and services. Conversely, if the price level rises, the real value of the dollar will
decrease, effectively making consumers poorer. Poorer consumers will spend less on consumption,
decreasing the demand for goods and services.

The second reason is the Interest Rate Effect which explains that a lower price level reduces the interest
rate and makes borrowing less expensive, which encourages greater spending on investment goods. This
increase in investment spending means a larger quantity of goods and services demanded.

Thirdly the Exchange-Rate Effect explains that a lower price level in a particular country causes interest
rates to fall and the real exchange rate to depreciate, which stimulates the country’s net exports. The
increase in net export spending means a larger quantity of goods and services demanded

Thus, the downward slope of the aggregate demand curve shows that a fall in the price level raises the
overall quantity of goods and services demanded.