Aggregate Supply and Aggregate Demand

,Aggregate demand
 Aggregate demand is a schedule or curve that shows
the various amounts of real domestic output that
domestic and foreign buyers collectively will desire to
purchase at each possible price level.
 It shows an inverse relationship between price level
and real domestic output.
 When the price level rises, the quantity of real GDP
demanded decreases, and vice versa.

,The Aggregate Demand Curve

, Inverse relationship between
price level and real output
Real balances effect:
 When price level falls (rises), the purchasing power of
existing financial balances [accumulated savings
balance] rises (falls), which can increase (decrease)
spending.
 e.g., a higher prices level erodes/destroy the purchasing
power of savings accounts or bonds, the public is
poorer in real terms and will reduce its spending.