The relationship between price levels and aggregate demand is typically shown as what type of curve?

The relationship between price levels and aggregate demand is represented as a downward sloping curve. This reflects the fundamental economic principle that, all else being equal, as the price level decreases, the quantity of goods and services demanded increases. This phenomenon can be attributed to several effects:

1. Wealth Effect: When the price level falls, the real value of money increases, allowing consumers to purchase more goods and services with the same amount of money. This increase in purchasing power leads to higher consumption.

2. Interest Rate Effect: Lower price levels can lead to lower interest rates, as consumers and businesses reduce their demand for money. Lower interest rates encourage borrowing and investment, which in turn boosts aggregate demand.

3. Foreign Exchange Effect: A decrease in the domestic price level can make domestic goods and services cheaper relative to foreign goods and services, leading to an increase in exports and a decrease in imports. This change enhances net exports, further increasing aggregate demand.

These effects work in concert to produce a downward sloping aggregate demand curve, illustrating the inverse relationship between the price level and the total quantity of goods and services demanded within an economy.