What is the primary reason for the downward slope of the aggregate demand curve?

The downward slope of the aggregate demand curve is primarily attributed to the effect of price levels on household wealth, which is captured by the wealth effect. When the general price level decreases, the real value of money and other financial assets increases, making consumers feel wealthier. This increase in perceived wealth encourages households to spend more on goods and services, leading to an increase in aggregate demand.

Conversely, when the price level rises, the real value of money diminishes, causing consumers to feel less wealthy. As a result, households tend to reduce their consumption spending, which decreases aggregate demand. Thus, the relationship between price levels and household wealth directly influences consumer spending behavior, reinforcing the negative relationship between aggregate demand and the price level that results in the downward slope of the aggregate demand curve.

Other factors like changes in interest rates or income taxes can also impact aggregate demand, but they are not the primary reason for the curve's slope. Additionally, the relationship between supply and demand pertains more to the interaction of markets rather than explaining the specific downward trend of the aggregate demand curve.