Why does deman curve slopes downward?

Answer 1

1. Wealth effect: Price down means consumers are wealthier than if the price was higher, so they buy more.

2. Interest rate effect: As price goes down, people save more money. This increases the supply of money for loans, which in turn decreases their cost, which in turn drives up investment spending (GDP = C + I + G + NX, remember, consumption + investment + government spending + net exports).

3. Because the interest rate is lower as price goes down, investors will be more likely to invest in other countries (which will be more likely to have relatively higher interest rates), which drives up the NX part of the equation.