Explain whether you agree with the following statement: "The reason the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services."

Imagine you have a fixed amount of money to spend. When prices go down, the purchasing power of your money goes up. This means you can buy more with the same amount of money, or simply put, you feel richer. This phenomenon is known as the wealth effect.

In the context of the aggregate demand curve, as the price level in an economy decreases, consumers perceive an increase in their real wealth because their income can buy more goods and services than before. This perception often leads to an increase in consumer spending, which in turn drives the demand for goods and services. Consequently, the aggregate demand curve slopes downward; as price levels drop, the quantity of goods and services demanded swells.

Now let's dive into the interest-rate effect, which links the price level to investment spending, affected by changes in the interest rate. When prices fall, consumers need less money to make purchases, which means there's more money available in the banking system.

This surplus of funds tends to lower interest rates as banks have more capital to lend. Lower interest rates encourage businesses and individuals to borrow and invest in various projects or consumption. This boost in investment and consumer spending leads to an increase in the overall demand for goods and services. Hence, when the price level diminishes, not only does consumer spending rise due to the wealth effect, but investment spending also tends to rise due to falling interest rates, further contributing to the downward slope of the aggregate demand curve.

Crossing borders, the international-trade effect comes into play when we consider how changes in price levels affect a country's international competitiveness. If a country's price level drops, its goods and services become cheaper compared to foreign markets. As a result, the country's exports become more attractive on the global market, while imports, conversely, start to look expensive.

This shift favors domestic production and consumption - local goods are now relatively cheaper than foreign ones. Thus, an increase in exports and a decrease in imports bolster the aggregate demand, especially demand for domestically produced goods and services. So, the lower the price level, the more competitive a country's products are globally, which in turn, pushes the aggregate demand curve downward.