Which of the following is not an explanation for Aggregate Demand sloping downward?

• A. When CPI rises, consumer’s purchasing power decreases
• B. When CPI rises, nominal interest rates increase
• C. When CPI rises, wages are sticky compared to other prices
• D. When CPI rises, foreign goods become relatively cheaper

Answer: (C)

Verified step by step guidance

1. Step 1: Understand that Aggregate Demand (AD) slopes downward primarily due to three effects: the wealth effect, the interest rate effect, and the exchange rate effect.
2. Step 2: The wealth effect explains that when the Consumer Price Index (CPI) rises, the real purchasing power of consumers decreases, leading to lower consumption and thus lower aggregate demand.
3. Step 3: The interest rate effect states that a higher CPI leads to higher nominal interest rates, which discourages investment and consumption, reducing aggregate demand.
4. Step 4: The exchange rate effect means that when the domestic price level (CPI) rises, domestic goods become relatively more expensive compared to foreign goods, causing exports to fall and imports to rise, which decreases aggregate demand.
5. Step 5: Recognize that 'wages being sticky compared to other prices' is related to short-run aggregate supply, not aggregate demand, so it is not an explanation for why the AD curve slopes downward.