Running Head: AGGREGATE DEMAND AND SUPPLY CURVES
Aggregate Demand and Supply Curves
AGGREGATE DEMAND AND SUPPLY CURVES
1. Why the AD Curve is Negatively Sloped
The first complementary reason why the AD curve is negatively sloped is the effects of
wealth that cause changes in consumer spending. Since consumer spending is a detriment of the
AD, any effect on its value would also impact the nature of the AD curve. Conversely, an
increase in the level of prices on goods and services would reduce the purchasing power of
money, leading to the need to spend more on consumption because consumers are poorer (Lippi
& Reichlin, 2016). However, consumers will respond to this effect by reducing their level of
With a decrease in the level of consumption, the quantity of RGDP demanded by the
consumers will also decrease. On the other hand, a fall in the prices of goods and services will
increase the value of money, making the consumers wealthier and prompting them to increase
their expenditure with an increase in consumer expenditure, the quantity of RGDP demanded
will increase (Lippi & Reichlin, 2016).
The second complementary reason why AD curve is negatively sloped is the effect of
interest rates that causes a change in the investments. A fall in the level of prices prompts
households to hold less amount of money meant for their daily expenses on food, clothing, and
rent. Equally, firms will reduce the money held for taxes, wages, and inputs. Conversely, the
firms and households will channel the excess money to savings leading to an increase in the
supply of money available for loans and subsequently reducing the rate of interest.
Since the interest rate is a determinant of AD, a decrease in the rate of interests will lead
to more borrowing by firms and house...