Demand Curve

One reason why the aggregate demand curve has a downward slope is because of the wealth effect. The wealth effect is the change in quantity demanded caused by the change in price level affecting real wealth. An increase in price level would cause the value of real wealth to fall. When there is a fall in the value of wealth, there is a decrease in quantity demanded. Conversely, a decrease in price level would result in higher value of wealth, causing an increase in quantity demanded.

Another reason for the downward slope of the aggregate demand curve is the interest rate effect. The interest rate effect is the change in the quantity of investment demanded caused by the change in price level changing the interest rate. Were a chart to be drawn

The international trade effect is change in net exports caused by the change in price level. For example, when the price level a country A lowers, its goods and services becomes cheaper to foreign countries. This will cause other countries to buy more goods and services from country A, thus increasing net exports. Conversely, when its price level rises, its goods and services become more expensive to foreign nations, thus reducing the quantity of goods and services other countries buy to country A and resulting in a reduction in net exports. Additionally, the change in price level does not only affect the quantity of goods and services demanded by other nations, but to the consumers in country A as well. When price level rises, the consumers of country A are more attracted at buying goods and services from other countries that have lower prices, causing a reduction in the aggregate quantity of goods and services demanded in country

Any change in one of the these components would either increase or decrease the GDP of a country. And increase of one of them would increase output, while a decrease in one of these components would decrease output. With this in view, any change in savings rate would affect GDP due to the fact that it causes a change in one of its components, consumption. Higher savings rate causes lower consumption, reducing output. While lower savings rate causes higher consumption, resulting in higher output.

The reason why savings rate can either reduce or increase output is due to the reason that it is the quantity of money separated from the disposable personal income. Disposable personal income is the money consumers have to buy goods and services. When there is a high savings rate, more money is deducted from the disposable personal income, resulting in less money for the consumption of goods and services and decreasing output. A lower savings rate, on the other hand, would result in higher amount of money for consumption than if the savings rate had been higher, causing a higher