Aggregate Demand and Aggregate Supply

Aggregate Demand


  1. Define potential output, also called the natural level of GDP.
  2. Define aggregate demand, represent it using a hypothetical aggregate demand curve, and identify and explain the three effects that cause this curve to slope downward.
  3. Distinguish between a change in the aggregate quantity of goods and services demanded and a change in aggregate demand.
  4. Use examples to explain how each component of aggregate demand can be a possible aggregate demand shifter.
  5. Explain what a multiplier is and tell how to calculate it.

Firms face four sources of demand: households (personal consumption), other firms (investment), government agencies (government purchases), and foreign markets (net exports). Aggregate demand is the relationship between the total quantity of goods and services demanded (from all the four sources of demand) and the price level, all other determinants of spending unchanged. The aggregate demand curve is a graphical representation of aggregate demand.