Why the aggregate demand curve slopes downward?

the following graph shows the aggregate demand (ad) curve in a hypothetical economy. at point a, the price level is 140, and the quantity of output demanded is $300 billion. moving down along the aggregate demand curve from point a to point b, the price level falls to 120, and the quantity of output demanded rises to $500 billion.

as the price level falls, the cost of borrowing money will (rise, fall, remain the same) , causing the quantity of output demanded to (rise, fall, remain the same) . this phenomenon is known as the (exchange rate, interest rate , wealth) effect.

additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to (rise, fall) in foreign exchange markets. the number of domestic products purchased by foreigners (exports) will therefore (rise, fall, remain the same) , and the number of foreign products purchased by domestic consumers and firms (imports) will (rise, fall, remain the same) . net exports will therefore (rise, fall, remain the same) , causing the quantity of domestic output demanded to (rise, fall, remain the same) . this phenomenon is known as the (exchange rate, interest rate , wealth) effect.

Consider the following analysis

Explanation:

As the price level falls, the money demand falls and people save more. A higher amount of saving leads to a fall in interest rate; that is, the cost of borrowing money falls, causing the investment to rise, causing the quantity of output demanded (of which investment is a component) to rise. This phenomenon is known as the interest rate effect.

Additionally, as the price level falls, the money demand falls and people save more. A higher amount of saving leads to a fall in interest rate. The fall in the domestic interest rate will cause investors to invest abroad. This will increase the supply of dollars in the foreign exchange market, causing the real value of the dollar to fall in foreign exchange markets.

This makes US goods cheaper for foreigners and foreign goods more expensive for Americans, causing the number of domestic products purchased by foreigners (exports) to Rise, and the number of foreign products purchased by domestic consumers and firms (imports) to fall. Net exports will therefore Rise, causing the quantity of domestic output demanded to Rise. This phenomenon is known as the exchange rate effect.

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