The Aggregate Demand Curve

Assume there are no changes in the fiscal or trade balances so that maintaining the balance between aggregate expenditure and aggregate income requires that changes in investment spending (I) equal changes in private saving (S).

As the P ↑, M/P ↓. To induce a corresponding decline in money demand, r must ↑ so that other assets are more attractive and Y must ↓ to reduce the transactional need for money balances.

The higher interest rate (r) induces companies to reduce I. The decline in Y reduces S.

The AD curve will be flatter if

I is highly sensitive to r;

S is insensitive to Y;

money demand is insensitive to r; and

money demand is insensitive to Y.