This document discusses the aggregate demand curve and how it relates equilibrium in goods and money markets at different price levels. It explains that the AD curve slopes downward, as an increase in price level decreases output due to consumption and real wealth effects. It also discusses how shifts in monetary or fiscal policy variables like money supply, government spending, or taxes can shift the AD curve, changing output at each price level. The document provides an overview of the aggregate demand model and equilibrium concepts.

1. Aggregate Demand and Aggregate Supply
Team Members
Prince Raj
Meghdeep Goldar
Namrata
kritika Tanwar

2. The Aggregate Demand (AD) Curve
aggregate demand (AD) curve A curve that shows the negative
relationship between aggregate output (income) and the price level.
Each point on the AD curve is a point at which both the goods market
and the money market are in equilibrium.

3. The Aggregate Demand (AD) Curve
The Impact of an Increase in the Price Level on the Economy—Assuming
No
Changes in G, T
, and Ms
This figure shows that when P increases, Y decreases

4. The Aggregate Demand (AD) Curve
The Aggregate Demand (AD) Curve
At all points along the AD curve, both the
goods market and the money market are in
equilibrium. The policy variables G, T
, and
Ms are fixed.

5. The Aggregate Demand (AD) Curve
The Aggregate Demand Curve: A Warning
It is important that you realize what the aggregate demand curve represents.
The aggregate demand curve is more complex than a simple individual or market demand
curve.
The AD curve is not a market demand curve, and it is not the sum of all market demand
curves in the economy.
To understand what the aggregate demand curve represents, you must understand the
interaction between the goods market and the money markets.

6. The Aggregate Demand (AD) Curve
Other Reasons for a Downward-Sloping Aggregate Demand Curve
The Consumption Link
The consumption link provides another reason for the AD curve’s downward slope.
An increase in the price level increases the demand for money, which leads to an increase
in the interest rate, which leads to a decrease in consumption (as well as planned
investment), which leads to a decrease in aggregate output (income).
The initial decrease in consumption (brought about by the increase in the interest rate)
contributes to the overall decrease in output.

7. The Aggregate Demand (AD) Curve
Other Reasons for a Downward-Sloping Aggregate Demand Curve
The Real Wealth Effect
real wealth, or real balance, effect The change in consumption brought about by a change
in real wealth that results from a change in the price level.

8. The Aggregate Demand (AD) Curve
Shifts of the Aggregate Demand Curve
from Policy Variables
The Effect of an Increase in Money
Supply on the AD Curve
An increase in the money supply (Ms)
causes the aggregate demand curve to shift
to the right, from AD0 to AD1.
This shift occurs because the increase in Ms
lowers the interest rate, which increases
planned investment (and thus planned
aggregate expenditure).
The final result is an increase in output at
each possible price level.

9. The Aggregate Demand (AD) Curve
Shifts of the Aggregate Demand
Curve
from Policy Variables
The Effect of an Increase in
Government Expenditure G or a
Decrease in Net Taxes T on the
AD Curve
An increase in government spending (G) or
a decrease in net taxes (T) causes the
aggregate demand curve to shift to the
right, from AD0 to AD1.
The increase in G increases planned
aggregate expenditure, which leads to an
increase in output at each possible price level.
A decrease in T causes consumption to rise.
The higher consumption then increases
planned aggregate expenditure, which leads
to an increase in output at each possible price
level.

10. The Aggregate Demand (AD) Curve
Factors That Shift the Aggregate Demand Curve
Shifts of the Aggregate Demand Curve
from Policy Variables

11. Looking Ahead: Determining the Price Level
 Our discussion of aggregate output (income) and the interest rate in the goods
and money markets is now complete. You should have a good understanding of how
the two markets work together.
 The AD curve is a useful summary of this analysis in that every point on the
curve corresponds to equilibrium in both the goods and money markets for the
given value of the price level.
 We have not yet, however, determined the price level.

12. Key Terms
• aggregate demand (AD) curve
• contractionary fiscal policy
• contractionary monetary policy
• crowding-out effect
• expansionary fiscal policy
• expansionary monetary policy
• goods market
• policy mix
• real wealth, or real balance, effect