AGGREGATE DEMAND AND SUPPLY AGGREGATE DEMAND: -Aggregate demand is the amount that will be spent at different values ​​of the price level. It is composed of consumption (C), investment (I), public expenditure (6) and net exports (X—M). THE AGGREGATE DEMAND CURVE: - The aggregate demand curve shows the quantity of goods and services that households, businesses, foreign buyers and the government are willing to purchase at values ​​different from the general price level. It is based on the assumption that other elements (e.g. money supply, tax rates, marginal propensity to consume) remain unchanged. Figure 28. I shows an aggregate demand curve. WHY THE ADC CURVE GOES DOWN FROM LEFT TO RIGHT:- There are three main reasons why there is an inverse relationship between the general price level and aggregate demand and hence why the AD curve goes down from left to right. right.• A rise in the price level reduces the real value of individuals' income and wealth and therefore decreases their ability to consume.• Higher prices increase the demand for individuals and firms to hold money at higher purposes of transactions. This increase in the demand for money in transactions is likely to increase the interest rate and thus reduce the demand for consumer goods (consumption) and the demand for capital goods (investment). • An increase in the general price level will make domestic goods and services less expensive. competitive with foreign goods and services. This will reduce the demand for domestic products from domestic and foreign consumers. MOVEMENTS ALONG THE DEMAND CURVE:- As with a demand curve for a particular product, the cause of a movement along an aggregate demand curve will be a change in price, in this case if there is a change in the general price level. A...... middle of paper...... cursed at the level of full employment. However, they argue that this occurs at a level below full employment, but that when resource shortages begin to be felt, output and the general price level will increase or, if this occurs at a low level of economic activity, this will only lead to an increase in production. . Figure 28.14 shows an increase in aggregate demand increasing output but having no effect on the general price level. THE IMPORTANCE OF INVESTMENT: - Investment is a component of overall demand. Thus, an increase in investment will shift the aggregate demand curve to the right, which will stimulate economic activity. Investment not only influences aggregate demand; this also affects aggregate supply in the long run. An increase in investment increases the productive potential of the economy. Investment therefore generates demand and creates part of the resources necessary to meet this demand..