Thus, the downward slope of the aggregate demand curve
has usually been justified by the real balances effect (the Pigou effect) and the interest rate effect (the Keynes effect).
It is clear from these regression estimates and the scatter plots that the aggregate demand curve
slopes downward and the aggregate supply curve slopes upward.
The problem arises because shifts in the aggregate supply curve, given a fixed aggregate demand curve
, produce a negative correlation between the price level and our measures of real activity.
This shift back in the IS curve also causes the aggregate demand curve
to shift back.
If the higher energy price only lowered aggregate demand, policymakers could take offsetting actions to neutralize this shift by increasing the money supply, which would shift the aggregate demand curve
back to the right.
Finally, the price '*' is given by the intersection of the aggregate demand curve
and the line H[Q.
If different banks have different levels of required reserves, for example, the requirement K in the aggregate demand curve
will be equal to the average of the individual banks' requirements.
A recent article in this journal by Professors Saltz, Cantrell, and Horton questioned the validity and existence of the aggregate demand curve
The authors further show that the aggregate demand curve
for the convenience provided by Treasury debt is downward sloping; they provide estimates of the elasticity of demand.
In a simple model of the aggregate demand curve
of a stock, this risk deters risk-averse arbitrageurs from flattening the curve at the efficient price.
The aggregate demand curve
is not a rectangular hyperbola because different price levels along the curve correspond to different real money balances, with adjustment in the nominal interest rate to maintain equilibrium in the money market.
Another justification for the downward sloping aggregate demand curve
given by Colander (1995) is the Keynes effect, which refers to the effect which results from a change in prices causing a change in real monetary balances which will change interest rates causing a change in investment and durable consumption.