AGGREGATE SUPPLY AND DEMANDaggregate demand:-Aggregate demand is the amount that will be spent at different values ​​of the price level. It is composed of consumption (C), investments (I), public spending (6) and net exports (X—M). THE AGGREGATE DEMAND CURVE: The aggregate demand curve shows the quantity of goods and services that households, businesses, foreign buyers and the government are willing to purchase at different values ​​of the general price level. It is assumed that other factors (e.g. money supply, tax rates, marginal propensity to consume) remain unchanged. Figure 28. I shows an aggregate demand curve. WHY THE ADC CURVE SLOPES FROM LEFT TO RIGHT: There are three main reasons why there is an inverse relationship between the general price level and aggregate demand and therefore why the AD curve slopes down from left to right.• An increase in the level of prices reduces the real value of people's income and wealth and therefore decreases their ability to consume.• Higher prices increase the demand of people and businesses to hold money for transaction purposes. This increase in transactional demand for money is likely to increase the interest rate and thus reduce the demand for consumer goods (consumption) and the demand for capital goods (investment). • An increase in the general price level will make domestic goods and services less competitive with foreign goods and services. This will reduce the demand for domestic products from both domestic and foreign consumers. case a change in the general price level. A...... middle of paper ......curs to the full employment level. However they argue that this occurs under conditions below full employment, but where resource shortages begin to occur, both output and the overall price level will increase or if it occurs at a low level of economic activity it will cause output to increase solely. . Figure 28.14 shows an increase in aggregate demand that increases output but has no effect on the overall price level. THE IMPORTANCE OF INVESTMENTS: -Investment is a component of aggregate demand. So an increase in investment will shift the aggregate demand curve to the right, stimulating economic activity. Investments don't just affect aggregate demand; it also affects long-run aggregate supply. An increase in investment increases the productive potential of the economy. So investments generate demand and create some resources to satisfy it.