Answer to Question #114763 in Macroeconomics for Vhutshilo

Question

The best way to describe the relationship illustrated by the aggregate demand curve

Answer 1

The Aggregate demand curve is a representation of the quantity of commodities that is goods and services that are demanded at varied prices in an economy. Aggregate demand simply means a combination of demand for both goods and services. This relationship can be shown in the figure below.

The y-axis represents the price levels of goods and services (aggregate price measured by GDP) while the x-axis shows the actual quantity of goods and services. The Aggregate demand curve slopes downward with an inverse relationship between the price and the quantity commodities demanded.

The relationship between the price levels and output as GDP explains the nature of the curve having an assumption to keep the supply of money constant. An increase in price levels has an impact on reduced real GDP. Buyers tend not to purchase goods and services that exceed their financial strength that can be illustrated by reduced output.

With an increased supply of money, a shift of aggregate demand curve to the right is released with an increased GDP at the same price. Theses changes result from increased investment and other expansionary economic policies. On the other hand, a reduced supply of money shifts the aggregate demand curve to the left with reduced output of real GDP. Reduced GDP can be attributed to economic policies that are meant to reduce the supply of money like increased taxation or reduced government expenditure.