What does the Aggregate Demand (AD) curve illustrate?

The Aggregate Demand (AD) curve illustrates the total quantity of goods and services that all sectors of the economy—households, businesses, government, and foreign buyers—are willing to purchase at various price levels, assuming other factors remain constant. The downward slope of the AD curve reflects the inverse relationship between the price level and the quantity of output demanded; as prices fall, the quantity demanded typically increases because consumers can purchase more with their available income, and vice versa.

This concept is integral in understanding macroeconomic variables such as inflation, unemployment, and overall economic growth. The AD curve is a fundamental element in Keynesian economics, where shifts in the curve can indicate changes in consumer confidence, investment spending, government policy, or other economic factors that impact aggregate demand.

Understanding the AD curve is crucial for analyzing how various economic policies might affect overall economic activity, as well as providing insights into potential inflationary or deflationary pressures in the economy.