What is the Aggregate Demand Curve?

//What is the Aggregate Demand Curve?
What is the Aggregate Demand Curve? 2017-09-30T05:37:47+00:00

Definition: The aggregate demand curve is a economic graph that indicates how many goods and services households, firms, and the government are willing and able to buy.

What Does Aggregate Demand Curve Mean?

What is the definition of aggregate demand curve? The aggregate demand curve is the sum of all the demand curves for individual goods and services. Therefore, as the individual demand curve, it is downward sloping, representing an opposite relationship between the price and the quantity demanded. Higher prices lower the disposable income, and, thereby, consumption.

Conversely, lower prices increase the disposable income of consumers who spend more, save more, and invest more. Furthermore, lower interest rates lower the prices of goods and services, thereby increasing consumption and saving. The ADC shifts when a change in demand, government spending, investments, or net exports takes place.

Let’s look at an example.

Example

Three main factors affect the aggregate demand curve, causing it to be downward sloping: the supply of money, the interest rates, and the next exports.

Consumers tend to believe that a nation’s government is able to keep the supply of money intact. Therefore, when the general price level rises, the supply of money to the economy loses its value, meaning the purchasing power of consumers diminishes. As consumers have less money to spend, the demand for goods and services decreases as well. Conversely, when the general price level decreases, the purchasing power of consumers increases. As consumers have more money to spend, the demand for goods and services increases.

The same happens with the interest rates. As the general price level rises, consumers and businesses require more money to spend. However, as the supply of money to the economy remains intact, the interest rates rise, causing consumer spending to decline.

Finally, when the prices of domestic goods and services increase, the imported goods are cheaper, thereby increasing the demand for imports and lowering the demand for exports. As a result, the net exports of the economy decrease, causing a respective decrease in the nation’s GDP.

Summary Definition

Define Aggregate Demand Curve: ADC means a graph showing the overall demand for goods and services of an economy.