Aggregate Demand

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    AD slopes downwards because, as the price level falls, real income rises so aggregate expenditure rises. Moreover, as the price level falls, domestic goods become cheaper, UK consumers buy more UK goods so imports fall, foreign consumers buy more UK goods so exports rise and real GDP rises.

    Additionally, as the price level falls, the Monetary Policy Committee decrease interest rates, loans become cheaper, firms take out more loans, investment rises and real GDP rises.

     

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