This document discusses the relationship between the aggregate expenditure (AE) model and the aggregate demand (AD) curve. It explains that a change in AE due to price changes leads to a movement along the fixed AD curve, while a non-price change in AE causes the AD curve to shift. It also shows graphs depicting how an increase in the price level reduces AE and GDP, represented as a downward shift of the AD curve. Finally, it illustrates that any non-price change in AE, such as an investment increase, results in an upward shift of both the AE curve and the AD curve, raising equilibrium GDP.

1. CHAPTER 32 APPENDIX
Relationship of AD Curve to AE Model

2. Aggregate Expenditure and Aggregate Demand
• A change in aggregate expenditure leads to
• A movement along the aggregate demand curve if the change
in AE is cased by price changes.
or
• A shift of the aggregate demand curve if the change in AE is
cased by determinants of AE except for price changes.
14-2

3. Price Level Change and Aggregate Expenditures
• Inverse relationship between Price
level and Equilibrium GDP
• As price level increases from P1 to
P2, consumption and investment
decrease (real balance effect,
interest rate effect, and foreign
purchase effect).
• As consumption and investment
decreases, the aggregate
expenditures decrease, and the AE
curve shifts down from AE1 to AE2.
• Equilibrium GDP decreases from
Q1 to Q2.
14-3
AggregateExpenditures
(billionsofdollars)
45°
AE2 (at P2 )
AE3 (at P3 )
AE1 (at P1 )
Q3 Q2 Q1
1
2
3
LO1
LO1
LO1

4. Aggregate Demand Curve
• An inverse relationship
between price level and
Equilibrium GDP is
shown in the diagram
below as a downward
sloping aggregate
demand curve.
• Aggregate expenditures
= Quantity of output
(real GDP) demanded
14-4
PriceLevel
AggregateExpenditures
(billionsofdollars)
45°
AE2 (at P2 )
AE3 (at P3 )
AE1 (at P1 )
Q3 Q2 Q1
Real Domestic Product, GDP
AD
P3
P2
P1
1
2
3
2
1
3
LO1
LO1
LO1

5. Changes in AE and Aggregate Demand Curve
• Any other changes in aggregate
expenditures (beside price level) results in
changes in the equilibrium GDP and a shift
of aggregate demand curve.
• Holding price level constant at P1, an
increase in investment increases the
aggregate expenditures, shifts up AE curve
from AE1 to AE2, and increases the
equilibrium GDP from Q1 to Q2. On the
aggregate demand digram, it moves from
a to b as real GDP changes from Q1 to Q2
at the same P1, indicating a shift of AD
curve from AD1 to AD2.
14-5
PriceLevelAggregateExpenditures
Real Domestic Product, GDP
45°
AE2 (at P1 )
AE1 (at P1 )
Q1 Q2
AD1
P1
AD2
a
b