Aggregate Demand Curve

AGGREGATE DEMAND CURVE 1

Aggregate demand is the overall spending of all levels of nationalincome accounts: consumption, investment, government expenditure andnet exports. Aggregate demand curve is a curve that indicates theequilibrium level of Real GDP of a country at each price level.[ CITATION Edw07 l 1033 ]

When pricelevels rise, there will be an increase in the quantity of moneydemanded to buy the same quantity of goods. The increase in demandfor money will lead to higher interest rates. .

Aggregate demand curve slopes negatively because an increase ingeneral price levels increases the demand for money that increasesthe interest rate. The rise in rates leads to a reduction ininvestment and causes a reduction in the level of equilibrium output.[ CITATION Edw07 l 1033 ]

An increase prices from P 1 to P 0 leads to adecrease in output from Y 0 to Y 1. At price P0 the cost of production is very high, and investorsproduce few goods. To the consumer, the cost of goods is very high,therefore, only few goods are purchased. At price P 1 thecost of production is relatively low and more goods are produced byinvestors. To the consumer, the prices of goods are relatively low,and they can afford more goods, therefore higher demand.

References

Edwin, G. Dolan. Introduction to Microeconomics. 2007.