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Aggregate Demand (AD) curve

Definition

The Aggregate Demand (AD) curve shows the relationship between overall price levels and total output demanded in an economy at different levels of real income or GDP. It represents consumer spending, investment, government spending, and net exports combined.

Analogy

Think of an AD curve as a roller coaster ride at an amusement park. As you climb up towards high price levels, people become less willing to spend due to expensive goods (similarly when climbing up slowly). On the other hand, as you descend towards lower price levels, people become more willing to spend because goods are cheaper (just like when descending rapidly).

Related terms

Aggregate Supply (AS) curve: The Aggregate Supply (AS) curve shows the relationship between overall price levels and total output supplied in an economy. It represents how businesses respond to changes in prices, wages, and production costs.

Multiplier effect: The multiplier effect refers to the amplification of initial changes in spending through the economy. When aggregate demand increases, it leads to higher production, income, and employment, creating a positive feedback loop.

Sticky prices: Sticky prices refer to situations where prices do not adjust quickly or easily to changes in supply or demand. This can affect how quickly an economy responds to shocks and adjusts its equilibrium level of output.