Chapter 9, Problem 1CQ

To determine

Explain the reason why the aggregate demand curve is inversely related to the price level.

Explanation of Solution

The components of the aggregate demand are consumption, investment, government spending, and net export. The aggregate demand is determined by the price of the commodity. If the price of a commodity increases, the consumer will consume some other products or reduce their expenditure. If the expenditure reduces, the overall consumption will decrease. A decrease in the price level will result in an increase in consumption. Therefore, the aggregate demand curve shows the inverse relationship between the price level and the quantity.

The inverse relationship between the aggregate demand curves that are different from the demand curve of specific good is that, if the price level increases in aggregate goods, it causes a price level increase in the entire economy, but in the case of a single commodity, the price increase will result in an increase in the price of a specific good only, which would not affect the entire economy.

Economics Concept Introduction

Aggregate demand curve: The aggregate demand curve shows the combination of the negative relationship between the prices level and the quantity as a whole.