The
aggregate demand (AD) curve is a negatively sloped line in a diagram
that measures the price level along the vertical axis and income
along the horizontal one. It generalizes the results derived from
the MundellFleming model.
The MundellFleming model assumes prices to be fixed. The AD curve
asks how the equilibrium income derived in the MundellFleming model
changes if the price level was to change after all. To see how the
price level bears on equilibrium income, we start by looking at
how the market equilibrium lines, that is FE, LM and IS are affected
by changes in the price level:
FE and the price level
LM and the price level
IS and the price level
To find out what the aggregate demand curve looks
like, we need to merge the three markets into one diagram. The income
levels at which all three marketequilibrium planes intersect at
different price levels will then mark the AD curve. Just as when
we discussed the MundellFleming model, we need to discuss fixed
and flexible exchange rates separately.
AD curve (flexible exchange rates)
AD curve (fixed exchange rates)
