According to the class, why does the AD curve have a negative slope? a) When P...
According to the class, why does the AD curve have a negative slope? a) When P rises, people substitute away from more expensive goods and services so AD decreases b) When P rises, the purchasing power of income falls so AD decreases c) When P rises, G decreases which means AD decreases d) When P rises, the supply of money shifts left so r falls so AD decreases e) Because your instructor says so
Homework Answers
AD curve represents the total quantity of goods and services demanded by the economy at different price levels. It shows negative relationship between price level and real GDP.
AD curve is drawn keeping money supply constant. When price level rises, the value of money supply falls or purchasing power falls. The same amount of money now buys less goods and services. So people demand less goods and services.
So, Answer= b) When P rises, the purchasing power of income falls so AD decreases
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