00:01
To understand why the aggregate demand curve is downward sloping, we need to review each of the components that make up aggregate demand, where we have consumption, investment, government spending, and net exports.
00:12
For this particular response, government's expenditure is not so important.
00:17
But if we look at this consumption factor here, we need to take into account is the wealth effect.
00:26
And what this means is that as the price level increases, people's wealth essentially diminishes, right? because that money that we're currently holding on to has lost some of its value in part due to inflation.
00:37
So because of the wealth effect, what we tend to see is that this rise in the price level reduces spending, or otherwise reduces consumption.
00:56
Then looking at investment, here we tend to see the interest rate effect.
01:12
And what this is telling us is that as outputs rise, these same purchases would take more money to actually purchase and to produce.
01:20
So we're going to see an increase in demand for money, meaning we're going to see interest rates increase.
01:25
And these higher interest rates reduce borrowing.
01:29
So we see an increase in rates, thus a decrease in borrowing and a decrease in investment...