Why is the AD curve downward sloping? 1. The higher interest rate produced by a lower price level leads to more consumption spending, investment spending, and net exports.
2. AD slopes downward for the same reasons the demand for an individual good slopes downward: because of income and substitution effects.
3. If nothing else changes, a decrease in the price level reduces aggregate expenditure on goods and services.
4. An increase in the price level decreases real money balances, which raises the interest rate. The higher interest rate decreases consumption spending, investment spending, and net exports.