Question

below is part of the question i dont get, Aggregate demand is suppose to be negative slope but the function is positive slope, please explain how to interpret this,

Ive searched the internet it give me reasons why it is inverse and downward sloping, I just dont see in the math part how I can interpret this as negative.

Also the explicit price thing is confusing.

Assume we start from full employment (i.e. output is at potential), with investment spending I = 3, Government purchases G = 4, Net exports NX = ?1, and Consumption C = 6 + 0.8Y ? P. Everything (except MPC of course) is expressed in trillions of dollars. Note that here we are making the dependence of consumption on the price level explicit (instead of incorporating it in the autonomous component, along with the factors - other than current income - aecting C). Using this information, aggregate demand (AD) can then be expressed as

Y = 6 + 0.8Y ? P + 3 + 4 ? 1

= 12 + 0.8Y ? P

1. Assume the economy is initially in equilibrium at potential (so it's in a long-run equilibrium) and the price level is P ? = 10. What is the level of potential output?

2. Assume consumption is now C = 5+0.8Y ?P. Use the multiplier to compute the overall effect on aggregate expenditure of the change in autonomous consumption: this represents the amount by which the the AD curve shifts.

Answer 1

Assuming the economy is initially in equilibrium at potential (so it's in a long-run equilibrium) and the price level is P ? = 10. the level of potential output is given by

Y= 12+0.8Y ?P

Y- 0.8Y?P = 12

Y=12/(1-0.8?P)

Y= 12/(1-(0.8*10))

Y= 12/(-7)

Y= -1.7143

thus in long equlibrium output is equal to potential ouput

hence potential output is -1.7143

answer (2)

the aggregate expenditure (AE) is given by

AE = C + I

=5+0.8Y?P + 3

= 5 + 0.8*Y*10 + 3

= 8 + 8Y

   Now suppose that planned investment increases from the original value of $3 to a new value of $8 —an increase of $5. This increase in planned investment shifts the aggregate expenditures curve upward by $5, all other things unchanged.