The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for which of the following?

• A. The upward slope of the aggregate supply curve
• B. The law of diminishing marginal utility
• C. The equilibrium price in a perfectly competitive market
• D. The downward slope of the aggregate demand curve

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the context of the problem, which involves the wealth effect, interest-rate effect, and exchange-rate effect. These are economic concepts that explain changes in aggregate demand in macroeconomics.
2. Step 2: Recall that the aggregate demand curve shows the relationship between the overall price level and the quantity of goods and services demanded in the economy.
3. Step 3: Recognize that the wealth effect explains how a lower price level increases the real value of money, making consumers feel wealthier and thus increasing consumption.
4. Step 4: Understand that the interest-rate effect describes how a lower price level reduces the demand for money, leading to lower interest rates, which encourages more investment and consumption.
5. Step 5: Know that the exchange-rate effect shows how a lower domestic price level can lead to a depreciation of the domestic currency, making exports cheaper and imports more expensive, thereby increasing net exports and aggregate demand.