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An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources: [6] = + + + where
The dynamic aggregate demand curve shifts when either fiscal policy or monetary policy is changed or any other kinds of shocks to aggregate demand occur. [5]: 411 Changes in the level of potential Y also shifts the AD curve, so that this type of shocks has an effect on both the supply and the demand side of the model. [5]: 412
The theoretical system we have described is developed over chapters 4–18, and is anticipated by a chapter which interprets Keynesian unemployment in terms of 'aggregate demand'. The aggregate supply Z is the total value of output when N workers are employed, written functionally as φ(N). The aggregate demand D is manufacturers' expected ...
Keynes interprets this as the demand for investment and denotes the sum of demands for consumption and investment as "aggregate demand", plotted as a separate curve. Aggregate demand must equal total income, so equilibrium income must be determined by the point where the aggregate demand curve crosses the 45° line. [63]
Too little aggregate demand will have the opposite effect of creating more unemployment and lower wages, thereby decreasing inflation. Aggregate supply shocks will also affect inflation, e.g. the oil crises of the 1970s and the 2021–2023 global energy crisis .
If the demand decreases, then the opposite happens: a shift of the curve to the left. If the demand starts at D 2, and decreases to D 1, the equilibrium price will decrease, and the equilibrium quantity will also decrease. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has ...
The DAD (Dynamic aggregate demand) curve is in the long run a horizontal line called the EAD (Equilibrium aggregate Demand) curve. The short run DAD curve at flexible exchange rates is given by the equation: = + + (+)
The Keynesian cross is a simplification of the ideas contained in the first four chapters of the General Theory. It differs in several significant ways from the original formulation. In its original formulation, Keynes envisaged a pair of functions that he referred to as an aggregate demand and an aggregate supply function.