There are three generally accepted potential reasons why the AD curve would be downward sloping:

1. The Pigou or wealth effect that causes the real value of consumer money balances to increase as the price level falls so that consumer expenditures increase.

2. The Keynesian interest rate effect through which a drop in the price level reduces the nominal amount of money required by consumers so that they shift some money into interest bearing accounts that cause interest rates to fall. This stimulates aggregate demand.

3. The Mundell-Fleming exchange rate effect through which the lower domestic interest rates cause investors to seek financial investments in other countries, thereby reducing the exchange rate. The lower exchange rate makes domestic goods cheaper to foreigners and stimulates domestic demand.

The first reason why the demand curve might not be downward sloping is that each of these effects might be weak or non-existent. For example, the wealth-elasticity of demand might be zero (or even negative), or the foreign price elasticity of demand for domestic output might be zero.

Another possibility is that there might be counter-veiling forces. The three effects above are all based on the ceteris paribus assumption that everything else remains unchanged. However, this might not be the case. Falling prices might make consumers pessimistic about the future possibility of a recession, and simply lead to hoarding, with no increased financial investment either in banks or abroad. Interest rates might not fall and even if they do, firms may also be pessimistic about profits and might not increase investment.