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Reduction in aggregate demand reduce real output

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Why does a reduction in aggregate demand reduce real output rather than the price level?


What is the basic objective of monetary policy? What are the strengths and weaknesses of monetary policy?

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Solution Summary

Aggregate demand is the total demand for goods and services in an economy.

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Aggregate demand is the total demand for goods and services in an economy. Aggregate demand is downward sloping because it is a general tendency that people buy less at higher prices and more at lower prices. If price levels are high, people tend to reduce their spending, and manufacturers and producers of goods and services reduce their output.

Declines in AD generally do not lead to lower prices. Many prices are "sticky" or inflexible in a downward direction. Reduction ...

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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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