Question

Discuss the reasons why the aggregate demand (AD) curve slopes downward.

What causes the AD curve and aggregate supply (AS) curve to shift, respectively?

How would a change in AD and AS affect the economy, respectively?

Why do Keynesian economists emphasize AD whereas classical economists emphasize AS?

Answer 1

First question is answered below

Aggregate demand is a downward sloping curve that shows the negative relationship between price and output or real gdp.

There are three reasons behind downward sloping aggregate demand.

i) wealth effect- as price rises wealth consumers are holding decreases because of constant money supply. Decrease in wealth makes buyers poorer which makes them reduce their demand for goods and services.

ii) interest rate effect- as the price rises buyers need more money to buy goods which leads to increase demand for money. Because money supply is constant, interest rate rises. Interest rate is the return on bonds buyers can earn. So they reduce their demand.

iii) Net exports effect- as price level rises, foreign goods become cheaper which leads to increase in demand for imports which compensates for domestic goods. Thus demand for domestic goods decreases.