> Why does the Aggregate Demand curve slope downward? - The Wealth effect 0 Higher aggregate price level reduces the purchasing power 0 Change in the quantity of aggregate demand that results from wealth changes due to price level changes 0 Real wealth: W/P 0 Higher real wealth- higher quantity of aggregate demand 0 Lower real wealth- lower quantity of aggregate demand - The Interest Rate Effect 0 Higher aggregate price level leads to a rise in interest rates ' When savings are reduced the supply of loan able funds shift left, increasing interest rate, which reduces investment spending I - If I decreases, then the quantity of aggregate demand decreases - AD: C (wealth effect)+ I (Interest Rate Effect)+ G+ NX (ITE) - Decrease in C, I, NX= Increase in Price level, Decrease in Real GDP 0 Increase in C,I, NX= Decrease in Price level, Increase in Real GDP > Relationship between AD and the Income Expenditure Model . The AD curve is the application of the income-expenditure model at different prices ' When the aggregate price level changes the AE planned curve shifts > AD Curve Shifters - t 'Innv'nnn 1\" "van/qua. nv'n