What Is an Aggregate Demand Schedule?

Jim B.

Aggregate demand schedule is a study of the relationship between national price levels and the product consumption levels of its inhabitants. This is an important concept in macroeconomics, which is the study of an economy as a whole rather than of the spending proclivities of its citizens. The aggregate demand is generally measured by a country's Gross Domestic Product (GDP), while the price levels are measured by some sort of price index. Lining these two measurements up in a chart forms an aggregate demand schedule which can be graphed to show the inverse relationship between the two.

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Economies can be studied in two different ways. Microeconomics offers a look at how individuals spend and save their money depending on the economic stimuli surrounding them in their lives. By contrast, macroeconomics takes that view and expands it over the breadth of an entire nation. One of the most important concepts in macroeconomics is aggregate demand, which is the total demand for products by all citizens in a country. The way aggregate demand reacts to price levels is the basis for the aggregate demand schedule.

To create an aggregate demand schedule, certain measurements have to be collected. A price index, like the Consumer Price Index in the United States, represents price levels. Corresponding levels for aggregate demand have to be found for these price levels, and these can be gathered from a country's GDP, which measures consumption levels by adding up all consumer spending, business and government investment, and net exports.

Putting these two measurements side by side in a chart shows an aggregate demand schedule and the inverse relationship between the two measurements. In other words, when price levels rise, aggregate demand falls, and vice versa. When plotted on a graph, with price levels on the vertical axis and aggregate demand on the horizontal axis, this inverse relationship is shown by a line that swoops from high up near the vertical top to down near the bottom of the horizontal right, representing a difference of about 45 degrees.

There are three main reasons for the inverse relationship of the aggregate demand schedule. Rising prices devalues the money held by consumers, leaving them with less to spend on products. Interest rates also rise with inflation, making it wiser to save money than to spend it. Finally, imports from foreign nations become more desirable when local prices are high, while foreign demand for exports falls as well.

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