5 The AD curve slopes downward because when the price level

5 The AD curve slopes downward because when the price level is lower, people can afford to buy more and aggregate demand rises. When prices rise, people can afford to buy less and aggregate demand falls. Is this a good explanation of the shape of the AD curve? Why or why not?

Solution

Yes, this is known as income effect. when the price of the goods are low the demand for the goods are high and as the prices go on increasing the demand for the goods decrease because at a higher price people with limited money spend less on the good.

Apart from this, the substitution effect and real balance effect are the other reasons why the demand curve shift downwards when the price decrease and vice versa.