MOD-2.A—a. Define (using graphs as appropriate) the aggregate demand (AD) curve. b. Explain (using graphs as appropriate) the slope of the…

a. Define (using graphs as appropriate) the aggregate demand (AD) curve. b. Explain (using graphs as appropriate) the slope of the AD curve and its determinants.

• The aggregate demand (AD) curve describes the relationship between the price level and the quantity of goods and services demanded by households (consumption), firms (investment), government (government spending), and the rest of the world (net exports).
• The negative slope of the AD curve is explained by the real wealth effect, the interest rate effect, and the exchange rate effect. [See EK MKT-3.A.1]
• Any change in the components of aggregate demand (consumption, investment, government spending, or net exports) that is not due to changes in the price level leads to a shift of the AD curve.
• Enduring understanding MOD-2: Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.