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Shifts to the right

The aggregate demand curve also can shift right as the economy expands. When the aggregate demand curve shifts right, the quantity of output demanded for a given price level rises. Therefore, a shift of the aggregate demand curve to the right represents an economic expansion. A shift of the aggregate demand curve to the right is simply effected by the opposite conditions that cause it to shift to the left.

Limits of aggregate demand

The aggregate demand curve alone is useful. It tells how the price level and output or income are related. It shows the general effects of changes in many economic variables and the relationship between price level and output or income. But there are limits to its usefulness. It cannot show where the economy currently sits. Similarly, it cannot predict the effects of an economic policy upon the economy.

In the next section, we will look at aggregate supply. This counterpart to aggregate demand completes the AS-AD model of the macroeconomy. That is, the aggregate supply and aggregate demand model of the economy is based on the total demand for goods and services and the total supply of goods and services. Once you are comfortable with the reasons for the downward sloping aggregate demand curve and with the ways and directions that the aggregate demand curve shifts, you are prepared to move on to the aggregate supply curve.

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