Final answer:
The aggregate demand curve slopes downward due to the wealth effect, the interest rate effect, and the foreign price effect.
Explanation:
The aggregate demand curve is downward sloping due to three main reasons:
- The wealth effect: Higher price levels reduce real wealth, leading to decreased consumption.
- The interest rate effect: Higher prices result in greater demand for money, raising interest rates and reducing investment spending.
- The foreign price effect: Price level increases make domestic goods pricier, discouraging exports.
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