Aggregate Demand

1. Presenter
Md. Shakil Ahmed
ID- B120202067
Jagannath University, Dhaka, Bangladesh

2. Aggregate Demand
• In macroeconomics, aggregate demand is the total demand for final
goods and services in an economy at a given time. It specifies the
amounts goods and services that will be purchased at all possible price
levels. This is the demand for the GDP product of a country.
• AD = C + I+ G +( X – M )
Here, c = consumption G = Govt Spending
I = Investment X-M= Total export - Import

3. AD CURVE
PRICE LEVEL
AD
P
Y Real GDP

4. Market
Goods Market Money
Market
 Place of goods and services
exchanged.
 Aggregate output is
determined.
 Financial instruments
exchanged.
 Interest rate is determined.

5. Relationship Between Interest rate ( r ) and aggregate output income ( Y )
• There are negative relationship between Y and r .
• The equilibrium value of Y falls when r rises and rises when r falls.
• The reason of negative relationship between them because of negative relation between planned
investment and the interest rate.
r I AE Y
Again,
r I AE Y

6. IS Model
r3
Interest
Rate r2
r1
y3 y2 y1 Aggregate output Y
Equilibrium point
IS Curve

7. IS Model
• The negative relationship between the equilibrium of y and r is called IS curve.
• When the interest rate rises, planned investment ( I ) falls and this decrease in ( I )
leads to a decrease in the equilibrium value of Y .
• Each point on the IS curve represent the equilibrium point in the goods market
for the given interest .

8. LM Model
• The positive relationship between the equilibrium value of r and y is
the LM curve .
Y Md r
Y Md r
When Y increases the demand for money increases because because
more money is demanded for the increased volume of transactions in
the economy .

9. LM Model
Interest
Rate LM Curve
r3
r2
r1
y1 y2 y3 output ( Y )
Equilibrium point

10. Equilibrium of IS and LM Model
• The point at Which the IS and LM curves intersect each other.
• The point indicates the equilibrium position in both the goods and money
market.
Interest IS Curve LM Curve
rate
re
Ye output income ( Y )

11. Shift of Money Supply ( Increase)
• An increase in Ms shifts the LM curve to the right.
• So Ms leads to higher equilibrium value of y and a lower equilibrium value of r .
Interest rate IS Curve Lm0 LM1
re
re1
ye ye1 aggr. Output ( Y )

12. Shift of Money Supply ( Decrease)
• A decrease in money supply leads to lower equilibrium value of Y and a higher
equilibrium value of ( r )because a decreased money supply causes the LM curve to shift
to the left.
Interest rate , r LM1 LM0
re1
re
ye1 ye output income y

13. Policy effects in the goods and money market
 Changes in Fiscal policy
- Expansionary policy ( Increase G aggregate output)
- Contractionary policy ( Decrease G aggregate output)
Changes in monetary policy

14. •
• The End