Explain the three reasons given for the downward slope of the aggregate demand curve.

What will be an ideal response?

The three reasons given are the real-balances effect, the interest-rate effect, and the foreign purchases effect.
The real-balances effect refers to the idea that a higher price level will reduce the purchasing power of the population’s accumulated financial assets. Because of the decline in value of such assets, people will feel poorer and will reduce their spending. Conversely, as the price level falls the opposite will occur.
The interest-rate effect assumes that as the price level rises so will interest rates, and rising interest rates will reduce certain kinds of spending such as consumption spending on durable goods and investment spending.
The foreign purchases effect assumes that if the price level rises in the U.S. relative to that in foreign countries, Americans will increase spending on imports at the expense of domestically produced goods and services, and foreigners will reduce purchases of U.S. goods. In other words, net exports decline.