The aggregate demand schedule shows the relationship between national price levels and product consumption levels. It is an important concept in macroeconomics, measured by GDP and a price index. The inverse relationship between the two is shown on a graph, with three main reasons for the relationship being rising prices, interest rates, and imports.
The aggregate demand schedule is a study of the relationship between national price levels and the product consumption levels of its inhabitants. This is an important concept in macroeconomics, which is the study of an economy as a whole rather than the spending trends of its citizens. Aggregate demand is usually measured by a country’s Gross Domestic Product (GDP), while price levels are measured by some type of price index. Aligning these two measures on a graph forms an aggregated demand schedule that can be graphed to show the inverse relationship between the two.
Economies can be studied in two different ways. Microeconomics offers insight into how individuals spend and save their money depending on the economic stimuli that surround them in their lives. Macroeconomics, on the other hand, takes this view and expands it across the entire nation. One of the most important concepts in macroeconomics is aggregate demand, which is the total demand for products by all citizens of a country. How aggregate demand reacts to price levels is the basis of the aggregate demand schedule.
To create an aggregate demand schedule, certain measures must be collected. A price index, such as the US Consumer Price Index, represents price levels. Corresponding levels of aggregate demand must be found for these price levels and can be gleaned from a country’s GDP, which measures consumption levels by adding up all consumer spending, business and government investment, and net exports.
Placing these two measures side by side on a graph shows an aggregate demand schedule and the inverse relationship between the two measures. In other words, when price levels rise, aggregate demand falls and vice versa. When plotted on a graph, with price levels on the vertical axis and aggregate demand on the horizontal axis, this inverse relationship is shown by a line running from top to top near the top vertical to bottom near the bottom right horizontal, representing a difference of about 45 degrees.
There are three main reasons for the inverse relationship of the aggregate demand schedule. Rising prices devalue the cash held by consumers, leaving them with less to spend on products. Interest rates also rise with inflation, making it more prudent to save money than to spend it. Finally, imports from foreign countries become more desirable when local prices are high, while foreign demand for exports also falls.
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