Question

​If there were no wealth effect or interest rate effect, the aggregate demand curve would still be downward sloping.

True

False

Answer 1

This statement is true because the aggregate demand curve slopes downwards for three reasons. Two of them are wealth effect and interest rate effect and the third one is foreign exchange effect. Due to the fact that the other determinant will still be working, aggregate demand curve would still be downward sloping. (Under this case, a fall in the price level reduces the interest rate which causes net capital outflow and results in depreciating the currency so that net exports are increased. This increases the quantity of goods demanded so that there is an increased aggregate quantity of goods demanded).