Question 12

It slopes downward and to the right

An aggregate demand curve is characterized by a negative slope, indicating that as the price level decreases, the quantity of goods and services demanded increases, and vice versa. This relationship demonstrates the inverse correlation between price levels and real GDP.

A) It slopes downward and to the right

This statement accurately describes the aggregate demand curve. The downward slope illustrates that lower price levels lead to higher quantities of output demanded, reflecting the wealth effect, interest rate effect, and exchange rate effect.

B) It is equal to full-employment GDP

This statement is incorrect. Full-employment GDP refers to the output level when the economy is producing at full capacity, whereas the aggregate demand curve reflects various levels of output demanded at different price levels, not a fixed output level.

C) It shows a positive relationship between price level and real GDP

This statement is incorrect. The aggregate demand curve illustrates a negative relationship between price level and real GDP, meaning that as the price level rises, the quantity of real GDP demanded falls.

D) It is horizontal at the current level of wages

This statement is also incorrect. A horizontal line would suggest that the quantity demanded does not change with price levels, which does not align with the behavior of the aggregate demand curve that slopes downward.

Conclusion

The correct answer, indicating that the aggregate demand curve slopes downward and to the right, reflects fundamental economic principles. All other options misrepresent the characteristics of the aggregate demand curve, either by suggesting incorrect relationships or by referring to concepts outside the scope of the aggregate demand framework.