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Aggregate Demand Curve

Definition

The aggregate demand curve represents the total amount of goods and services that households, businesses, and government are willing to purchase at different price levels in an economy.

Analogy

Think of the aggregate demand curve as a shopping list. When prices are high, people tend to buy less because they want to save money. But when prices are low, people feel like they can get more for their money and are more likely to buy more items on their shopping list.

Related terms

Real Balances Effect: This effect states that as price levels decrease, the purchasing power of consumers increases, leading to higher consumption spending.

Interest Rate Effect: This effect suggests that as price levels decrease, interest rates also decrease, which stimulates borrowing and investment by businesses.

Foreign Trade Effect: This effect explains that as domestic prices decrease relative to foreign prices, exports become cheaper and imports become relatively more expensive. As a result, net exports increase.