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what is aggeregate demand according to closed economy?
Aggregate demand curve shows the relationship between the total quantities of output and price level demanded and price level in an economy. In a closed economy, it is basically a sum of household consumption expenditure, government expenditure and investment expenditure. It is a negatively sloped curve, representing that price level and output are inversely related. There are many reasons for negatively sloped aggregate demand curve; one reason lies in the relationship between real wealth and consumption expenditure. When there is fall in the price level, real value of wealth increases, causing purchasing power of wealth to increase. Increase in the real wealth induces households to spend more, causing consumption expenditure and hence aggregate demand to increase. Hence there is negative relationship between price level and aggregate demand. This relationship between price level and consumption expenditure is called wealth…

ct. The second reason for downward sloping supply curve lies in the relationship between interest rate and investment. When price level falls, households need less money for transaction purpose and so there will be fall in demand for money. The fall in demand for money would result in lower interest rate in the money market. Since interest rate is cost of investment expenditure, so fall in interest rate would lead to increase in investment spending, causing aggregate demand to increase. Again we find a negative relationship between price level and aggregate demand. So, aggregate demand curve is a negatively sloped curve.


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