Aggregate Demand

In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total
demand for final goods and services in an economy at a given time.[1] It specifies the amounts of
goods and services that will be purchased at all possible price levels.[2] This is the demand for
the gross domestic product of a country. It is often called effective demand, though at other times
this term is distinguished.
The aggregate demand curve is plotted with real output on the horizontal axis and the price level
on the vertical axis. It is downward sloping as a result of three distinct effects: Pigou's wealth
effect, Keynes' interest rate effect and the MundellFleming exchange-rate effect. The Pigou
effect states that a higher price level implies lower real wealth and therefore lower consumption
spending, giving a lower quantity of goods demanded in the aggregate. The Keynes effect states
that a higher price level implies a lower real money supply and therefore higher interest rates
resulting from financial market equilibrium, in turn resulting in lower investment spending on
new physical capital and hence a lower quantity of goods being demanded in the aggregate.
The aggregate demand curve illustrates the relationship between two factors: the quantity of
output that is demanded and the aggregate price level. Aggregate demand is expressed contingent
upon a fixed level of the nominal money supply. There are many factors that can shift the AD
curve. Rightward shifts result from increases in the money supply, in government expenditure, or
in autonomous components of investment or consumption spending, or from decreases in taxes.
According to the aggregate demand-aggregate supply model, when aggregate demand increases,
there is movement up along the aggregate supply curve, giving a higher level of prices.

Aggregate Supply
Aggregate supply, also known as total output, is the total supply of goods and services produced
within an economy at a given overall price level in a given time period. It is represented by the
aggregate supply curve, which describes the relationship between price levels and the quantity of
output that firms are willing to provide. Normally, there is a positive relationship between
aggregate supply and the price level.
Rising prices are usually signals for businesses to expand production to meet a higher level of
aggregate demand. When demand increases amid constant supply, consumers compete for the
goods available and therefore pay higher prices. This change in dynamic induces firms to
increase supply output to sell more goods. The resulting supply increase causes prices to
normalize and output to remain elevated.