FIGURE APX-1 DERIVING THE AGGREGATE DEMAND CURVE

The aggregate demand curve, which shows the quantities of goods and services demanded at different price levels for the entire economy, can be derived using the aggregate spending model. Panel A shows aggregate expenditures curves at two different price levels. Point a on aggregate expenditures curve AE(P₀) represents equilibrium income Y₀, equivalent to a real output of Q₀. Point a in panel B shows real output of Q₀ that is associated with equilibrium point a and its price level P₀. If the aggregate price level rises to P₁, aggregate spending will decline to AE(P₁) in panel A. The result is a new equilibrium at point b in both panels. Connecting points a and b in panel B results in aggregate demand curve AD.