20.3 The Aggregate-Demand Curve

20.3 a. Why the Aggregate-Demand Curve Slopes Downward

The downward-sloping aggregate demand curve shows the relationship between the price level for outputs and the quantity of total spending in the economy. As an increase in price level reduces people’s buying power, consumption spending will fall as the price level increases [10].

As outputs rise, the same purchases will take more money to accomplish. This additional demand for money and credit will push interest rates higher. In turn, higher interest rates will reduce borrowing by businesses for investment purposes and reduce borrowing by households for homes and cars This will reduce both consumption and investment spending [10].

Also, at a higher domestic price level, relative to price levels in other countries, will reduce net export expenditures [10].

Example: If the price level increases in the US while remaining fixed in other countries, US exports will be relatively more expensive, and thus the quantity of exports will fall [10].

^{Aggregate-Demand Curve [11]}

20.3 b. Why the Aggregate-Demand Curve Might Shift

The aggregate demand curve shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall. AD components can change because of different personal choices—like those resulting from consumer or business confidence—or from policy choices like changes in government spending and taxes [12].

Example: During the recession of 2001, a tax cut was enacted into law. When people going through hard times get relief from taxes, the consumption increases, shifting the AD curve to the right [12].

^{Shifts in Aggregate Demand [13]}