Question

Which of the following statements is TRUE? The aggregate demand curve slopes downward because at a higher price level:

the purchasing power of consumers' wealth declines and consumption decreases.

producers can get more for what they produce, and they increase production.

the purchasing power of consumers' wealth declines and consumption increases.

the purchasing power of consumers' wealth increases and consumption increases.

Answer 1

The aggregate demand curve is downward sloping because it shows the negative relationship which exists between price and demand for the good. Given the income is fixed, when the price of good increases, then the real income or wealth of the consumer decreases so he buys a lesser amount of the good, whereas when the price of good decreases, then the real income or wealth of the consumer increases so he buys more amount of the good.

So, the aggregate demand curve slopes downward because, at a higher price level, the purchasing power of consumer's wealth reduces so he buys a lesser amount of good which leads to decreases in consumption. Hence, the correct answer is the First Option i.e. at a higher price level the purchasing power of consumers' wealth declines and consumption decreases.