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Why is the slope of total demand (AD) negative? What would cause AD line to move...

Why is the slope of total demand (AD) negative? What would cause AD line to move out? The negative growth recorded in many countries this year is the result of AD moving to the left? China will record positive growth, and will it be caused by the outward shift of AD line?

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Answer #2

Slope of aggregate demand is negative because there is negative relationship between price of a good and its quantity demanded. As price rises, there is decrease in quantity demanded and vice versa.

AD move out when there is change in:

  • Price of substitute / complement good
  • Income
  • Taste and preference

One factor that is change in price cause movement along the demand curve while all other factors cause shift of demand curve.

It is true that negative growth rate of AD will shift AD to its left. China will record positive growth because due to coronavirus outbreak, they are exporting medical equipments across the world investing in firms across the world whose valucation have declined due to temporary closure of business. Exports, Investment have a positive relationship with AD which cause it to shift outward.

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