The Aggregate Demand (AD) curve can be derived from the aggregate expenditure model.
- An increase in the price level decreases aggregate expenditure.
- The decrease in aggregate expenditure is reflected in a downward shift in the AE curve.
- The decrease in aggregate expenditure leads to a decrease in equilibrium expenditure.
- Plotting the higher price level against the lower level of equilibrium expenditure creates a point on the AD curve.
- Because a higher price level results in a lower quantity of real GDP demanded, the AD curve is downward sloping.