The AD Curve and Equilibrium Expenditure

The Aggregate Demand (AD) curve can be derived from the aggregate expenditure model.

  1. An increase in the price level decreases aggregate expenditure.
  2. The decrease in aggregate expenditure is reflected in a downward shift in the AE curve.
  3. The decrease in aggregate expenditure leads to a decrease in equilibrium expenditure.
  4. Plotting the higher price level against the lower level of equilibrium expenditure creates a point on the AD curve.
  5. Because a higher price level results in a lower quantity of real GDP demanded, the AD curve is downward sloping.