Question

What factors affect the slope of the aggregate demand curve?

Short answer

The factors which affect the slope of IS curve affects the slope of AD curve in same manner. AD curve slopes downward and alter in rate $\mathrm{\pi }$, change in $\lambda$, and marginal propensity to consume (MPC) affect the slope of AD curve.

Step-by-step solution

Concept Introduction

Aggregate demand is that the total demand of products and services for a given index in an economy. The mixture demand curve shows the inverse relationship between rate (price level) and aggregate output. The mixture demand curve slope is downward, when the vertical axis shows the rate (price level) and also the horizontal axis shows the mixture output. Aggregate demand is that the sum of consumption expenditure, investment expenditure, government expenditure and net exports.

Explanation of Solution

AD curve equation is :

$\mathrm{Y}=[\overline{\mathrm{C}}+\overline{\mathrm{I}}-\mathrm{d}\overline{f}+\overline{\mathrm{G}}+\overline{\mathrm{NX}}-mpc\times \overline{\mathrm{T}}]\times \frac{1}{1-mpc}-\frac{\mathrm{d}+x}{1-mpc}\times (\overline{\mathrm{r}}+\lambda \pi )$

Where,

$\text{-}Y\text{is the Aggregate demand.}$

$\text{-}\stackrel{}{\overline{C}\text{is autonomous consumption.}}$

$\text{-}\stackrel{}{\overline{I}\text{is the investment expenditure.}}$

$\text{-}\mathrm{d}\text{is investment responsiveness to real interest rate.}$

$\text{-}\overline{f}\text{is financial friction.}$

$\text{-}\overline{G}\text{is Government expenditure.}$

$\text{-}\overline{\mathrm{NX}}\text{is net export.}$

$\text{- mpc is marginal propensity to consume.}$

$\text{-}\overline{\text{Tis}}\text{the tax.}$

$\text{- xis net export responsiveness to real interest rate.}$

$\text{-}\text{ris autonomous component of real interest rate.}$

$\text{-}\lambda \text{is the responsiveness of real interest rate to inflation rate.}$

$\text{-}\pi \text{is the inflation rate.}$

The factors which affect the slope of IS curve affects the slope of AD curve in same manner. AD curve slopes downward and alter in rate $\mathrm{\pi }$, change in $\lambda$, and marginal propensity to consume (MPC) affect the slope of AD curve.