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 **Aggregate demand (AD)** is the total demand for all goods and services in an economy at a given overall price level and in a given time period. It represents the quantity of goods and services that households, businesses, government, and foreign buyers are willing and able to purchase at various price levels. The aggregate demand curve is downward sloping, indicating an inverse relationship between the price level and the quantity of output demanded. There are several reasons for this downward slope: 1. **Wealth Effect (Real Balances Effect)**: As the price level falls, the real value of money increases, making consumers feel wealthier, which in turn increases consumption. 2. **Interest Rate Effect**: A lower price level reduces the demand for money, leading to lower interest rates. Lower interest rates reduce the cost of borrowing, encouraging investment and consumption. 3. **Exchange Rate Effect**: A decrease in the price level can lead to lower interest rates, which may result in