THE DOWNWARD-SLOPING AGGREGATE DEMAND CURVE

You will first notice that the aggregate demand curve in Figure 23-6 .slopes downward. This means that, holding other things constant, the level of real spending declines as the overall price level in the economy rises.

The aggregate demand curve slopes downward. primarily because of the effect. Remember that when we draw an AD curve, .we hold other  things constant, One important variable held constant is nominal money supply (i.e., the dollar value . of the money supply). So when-prices rise, the real When supply defined as the nominal money supply divided by the price level) must fall. ‘For example  suppose .the nation’s money supply is constant at $600 billion. Then, if the consumer price index doubles, the real money supply falls from $600 billion to $300 billion.

Other ‘factors also contribute to the relationship between real spending and the price level, although . they are today quantitatively less significant than the money-supply effect.

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