The aggregate expenditure framework that we have been using focuses on the components of aggregate demand (C, I, G, and the foreign sector). Recall that when we are looking at the changes in aggregate output stemming from changes in AE, the price level was assumed to be constant. While the AE framework is useful for depicting the multiplier effects of changes in C, I, G, or the foreign sector, it has some limitations. First, as aggregate output changes, so does the price level. In addition, the AE model does not fully develop the supply side of the economy. In this lecture, we will develop a framework that incorporates both the supply side of the economy as well as changes in the price level. Let us get started!

The Aggregate Demand Curve

How does the aggregate demand (AD) framework relate to the aggregate expenditure framework? Both have aggregate output (income, Y) on the horizontal axis, but while the AE model has planned aggregate expenditures on the vertical axis, the aggregate demand curve has the price level on the vertical axis. The AD model, then, relates changes in the price level with changes in aggregate output. Let us examine how price level changes generate changes in aggregate output.

• Deriving the Aggregate Demand Curve
• The Aggregate Demand Curve: A Warning
• Other Reasons for a Downward-Sloping Aggregate Demand Curve
• Shifts of the Aggregate Demand Curve