When looking at a graph of aggregate demand, which of the following is correct?

• A. The aggregate demand curve is horizontal, indicating that the price level remains constant regardless of changes in output demanded.
• B. The aggregate demand curve slopes upward from left to right, indicating that as the price level increases, the quantity of output demanded increases.
• C. The aggregate demand curve slopes downward from left to right, indicating that as the price level decreases, the quantity of output demanded increases.
• D. The aggregate demand curve is vertical, showing that changes in the price level do not affect the quantity of output demanded.

Answer: (C)

Verified step by step guidance

1. Understand the definition of the aggregate demand (AD) curve: it shows the relationship between the overall price level in the economy and the total quantity of goods and services demanded (real GDP).
2. Recall that the aggregate demand curve typically slopes downward from left to right, which means that as the price level decreases, the quantity of output demanded increases.
3. Recognize the reasons for the downward slope: the wealth effect (lower price levels increase real wealth, boosting consumption), the interest rate effect (lower price levels reduce interest rates, encouraging investment), and the net export effect (lower price levels make domestic goods cheaper relative to foreign goods, increasing exports).
4. Evaluate the incorrect options: a horizontal AD curve would imply price level does not change with output, an upward sloping AD curve would contradict the typical inverse relationship, and a vertical AD curve would mean price level changes do not affect output demanded, which is not the case in aggregate demand analysis.
5. Conclude that the correct description is that the aggregate demand curve slopes downward from left to right, indicating an inverse relationship between the price level and the quantity of output demanded.