3.1 Aggregate Demand (AD)
Aggregate demand is total spending on domestic output (C + I + G + Xn) at each price level; it slopes down via wealth, interest-rate, and net-export effects.
Aggregate demand shows the total quantity of domestic output purchased at each price level, summing consumption, investment, government purchases, and net exports (C + I + G + Xn). The axes are price level (vertical) and real GDP (horizontal) — not price and quantity of one good.
AD slopes downward for three reasons unique to macro: the wealth effect (a higher price level shrinks the purchasing power of money holdings, cutting consumption), the interest-rate effect (a higher price level raises money demand and interest rates, cutting investment), and the net-export effect (domestic goods get relatively pricier, so exports fall and imports rise).
AD shifts when any component changes for a reason OTHER than the price level: consumer or business confidence, wealth changes, government spending or taxes, interest-rate changes from policy, or foreign incomes and exchange rates. A price-level change moves you along AD; explaining the slope with single-good substitution logic loses the point.
Key terms for 3.1
Drag the curves yourself — the fastest way to make 3.1 stick.
Explaining AD's downward slope like a single-market demand curve ('people buy substitutes'). At the economy level there is no substitute for all output — you must cite the wealth, interest-rate, or net-export effect.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free — no spam.
No spam. Unsubscribe anytime.