Aggregate Demand Curve
The aggregate demand curve represents the total quantity of goods and services that households, businesses, and the government are willing to purchase at different price levels. It slopes downward, indicating that as prices decrease, the quantity demanded increases. It is a key concept in macroeconomics, illustrating the relationship between the price level and the level of real GDP demanded in an economy.
6 Key excerpts on "Aggregate Demand Curve"
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Recall that the total amount of final goods and services can be divided into the amounts spent for consumption, investment, government purchases, and net exports. The aggregate quantity demanded is the quantity of final output that buyers will purchase at a given price level. As seen in Figure 12.1, the Aggregate Demand Curve may look like a market demand curve, but it’s really different. Instead of showing the relationship between the price and quantity demanded of a single good—say, motorcycles—the Aggregate Demand Curve describes the relationship between the price level and the aggregate quantity of all final goods and services demanded in the economy. Movements along the Aggregate Demand Curve Referring to Figure 12.1, notice that the Aggregate Demand Curve is downward-sloping. As the price level falls, all else being equal, the total amount of final goods and services purchased rises. What explains this relationship? The price level is a determinant of the amount of money demanded. As the price level declines, households need to hold less money to purchase the goods and services they desire. Households thus try to decrease their holdings of money by lending it out as the price levels fall. For example, a household might place its excess money in an interest-bearing savings account at a bank. The increased supply of savings drives interest rates downward, thereby encouraging borrowing by households that wish to invest in new housing or by businesses that want to invest in new plant and equipment. Put simply, a lower price level decreases interest rates, which results in additional spending on investment goods and thus increases the aggregate quantity of goods and services demanded. 3 3 This explanation of the downward-sloping Aggregate Demand Curve is known as the interest rate effect...
eBook - ePubEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...The economy always ends up at the equilibrium price level and real GDP where AD = AS. Next, we turn to more details regarding the aggregate demand and aggregate supply curves. Aggregate demand (AD) is the total quantity of output (of goods and services) demanded by all sectors in the economy at various price levels. Aggregate demand is made up of five components: consumption (C), investment (I), government spending (G), exports (X), and imports (IM). A D = C + I + G + X − I M. Consumption refers to consumer purchases of goods and services. Investment refers to businesses’ purchases of investment goods and services, such as machinery, equipment, and construction services that expand the physical size of businesses’ operations. Government spending includes all government purchases of goods and services, such as the services of soldiers and teachers, the construction of roads, and so on. Exports refers to foreign purchases of domestically produced goods and services, such as U.S. exports to Europe. Imports refers to domestic purchases of foreign-produced goods and services, such as U.S. imports from Europe. Note that imports are subtracted from aggregate demand because increased spending on imports means that less money is spent in the domestic economy. Slope of aggregate demand. The Aggregate Demand Curve slopes downward because of three effects: The real balance effect: Higher prices mean less real wealth for consumers, causing consumers to spend less. Similarly, lower prices increase consumers’ purchasing power, leading to increases in consumer spending. The real interest rate effect: Higher prices cause real interest rates to rise because firms and individuals need to borrow more money to pay for more expensive goods. This results in decreases in spending on goods purchased with borrowed funds, including consumers’ purchases of houses and cars and businesses’ purchases of investment goods. The foreign trade effect: Higher prices on U.S. goods and services makes U.S...
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...Suppose consumers always wish to consume four-fifths of their income and that firms plan a fixed amount of investment, in real terms, equal to 20 units of output. At a price level of $1 per unit of output, the aggregate demand function is D = 0.8(Q) + 20. If the price level were the same at all levels of output, aggregate demand at selected levels of Q would be as follows: These figures show a “straight-line” relationship between real income and demand of the kind illustrated in Figure 6.1. Now suppose that supply prices ($ per unit of Q) at the various levels of Q are as follows: Fig. 10.2 Aggregate supply and demand curves. The demand curve indicates the total desired expenditure at each level of real output if goods are offered at the appropriate “supply price.” When both Q and D are multiplied by these prices, the resulting pQ’s are the values of aggregate supply for the different values of Q, and the pD’s are aggregate demand in money terms: When these figures are plotted in a graph, they are consistent with curves similar to those shown in Figure 10.2. Over most of its length, d (Q, p) has a curvature similar to that of the aggregate supply curve. To the right of the intersection of the two curves at E, expected revenue is greater than desired expenditure, while to the left of the intersection the reverse is true, indicating that E is a point of stable equilibrium with respect to both real output and the price level...
eBook - ePubMacroeconomic Theory: A Short Course
A Short Course
- Thomas R. Michl(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...Chapter 7 The Aggregate Demand Curve DOI: 10.4324/9781315702742-7 In this book, macroeconomic theory from the Keynesian cross to the IS-LM model is predicated on the constancy of wages and prices. To be more specific, we have assumed that wages are constant, and have maintained that prices are set by imperfectly competitive firms that mark-up their labor costs, so that price constancy results from wage constancy. We have ignored the labor market, where wages are determined, in order to get a good understanding of the product, money and asset markets. Now we are ready to include the labor market in our macroeconomic theory as well, and when we do we will have to confront the following question: how do changes in prices affect the level of aggregate demand? In this chapter, we will not try to explain the price level. Rather, we examine how changes in the price level affect aggregate demand. 7.1 Visualizing the AD curve As we have already observed, price changes have exactly the same effect on the IS-LM model as monetary policies; both change the real money supply and shift the LM curve. This insight leads to an inverse relationship between the level of aggregate demand and the price level that is called the aggregate demand (AD) curve. In general, the AD curve has the form Y = Y(P), although we will always graph the AD curve with real income on the horizontal axis and the price level on the vertical axis. We can visualize the AD curve by identifying two points on it that are defined by two arbitrary price levels, such as P 0 and P 1 in Figure 7.1. An increase in prices shifts the LM curve to the left as shown in the top panel because it reduces the real money supply for every given nominal quantity of money...
eBook - ePub- Ola Olsson(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...As we have already derived, the IS curve is negatively sloped whereas the MP curve has a positive slope. Equilibrium in both markets occurs where the two curves cross. In standard Keynesian analysis, the effects of exogenous changes in policy variables are analyzed in this diagram. Figure 11.2 The IS—MP curves. As an example, we might consider an increase in government expenditure G. Such a change increases total expenditure, which means that the IS curve must shift outwards from the origin, as in Figure 11.2. For a given r, the level of output that satisfies an equilibrium in the goods market must be higher than before. The MP curve remains unaffected since government expenditures are assumed not to affect the aggregate price level in the short run. The outward shift in the IS curve implies a higher level of equilibrium output but also a higher interest rate, r. 11.3 Aggregate Demand The aggregate demand (AD) curve shows all the combinations of inflation levels and output where equilibria in the money and goods markets prevail simultaneously. 4 Since the AD curve is drawn with the level of inflation on the vertical axis and output on the horizontal axis, we now assume that prices are not completely fixed. In order to see how the AD curve is derived from the IS—MP curves, consider an increase in the inflation rate, for instance due to a international oil shock. A rise in the inflation rate forces the central bank to increase the real interest rate. A higher r in turn increases the nominal interest rate, which reduces money demand. In the IS—MP diagram in Figure 11.2, a higher r at the same level of Y means that the MP curve shifts leftward and the two curves now cross again at a lower level of Y. The IS curve remains unaltered. Hence, a rise in π is associated with a fall in Y...
eBook - ePub- Enrico Colombatto(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...For example, one must have some information about the shape of the demand curve/region in order to assess the effects of a tax (see Chapter 6). Demand analysis explains why governments are inclined to tax goods with steep demand curves, so that consumers will keep buying the taxed commodity (and pay the tax) – as happens in the case of petrol/gasoline. Similarly, innovative producers strive to guess the shape and the position of the latent demand for new products, which might be steep (‘price inelastic’, according to the economic jargon) when a successful product is introduced, but might well rotate and become flat (‘price elastic’) as soon as imitations and substitutes follow. The thinking tools typical of traditional demand analysis can also be applied to related domains and contribute powerfully to a better understanding of areas in which common sense and intuition might not suffice. To illustrate this point, the next sections will examine three new issues: intertemporal choices, interest rates and happiness. 2.6 Intertemporal consumption and the rate of interest Demand curves are traditionally conceived in terms of goods and services. This is sensible, since these are the kinds of choices individuals face every day. When individuals engage in consumption, they are fairly aware of what they can afford to spend over a given period (a month, a year), and their task consists in distributing the budget at their disposal across a set of desirable items. Yet, the individual's expenditure budget over a given period is itself the result of a choice. For example, one could decide to spend all the money one earns immediately, day after day, month after month. Most frequently, however, current expenditure differs from current income. In particular, it might happen that one wants to consume in excess of his current income and thus plans to cover the difference by borrowing or by drawing on past savings...
