The amount of goods and services that will be purchased by all means is referred to as aggregate demand. It equals the gross domestic product and it describes the correlation between GDP and the price level. Apparently, the demand changes alongside with prices. Consumers want and are able to purchase more products when prices fall. Economists draw the aggregate demand curve, which helps them to predict the demand at the moment when the price on products changes.
Aggregate demand consists of several types of spending. They are consumer spending of individual households, businesses, and the government. Export and import also influence aggregate demand. As long as domestic production cannot fully satisfy American consumers, products will be imported into the country, thus, the demand for imported goods refers to GDP of other countries. Nevertheless, domestic production is also demanded abroad so that the export favors American GDP.
The aggregate demand curve is normally a downward slope which indicates that national GDP rises while prices fall. The rise in the price level makes businesses and households react quickly, and this reaction cannot favor GDP. If prices on domestic production rise, consumers switch to the imported goods that become more competitive. This is called a “trade” effect and indicates that the aggregate demand is low. Consumers who need to spend more money quickly become short of cash and borrow from banks reducing their liquidity. If the demand for cash is high, banks need higher interest rates to compensate their risks. Spending of households and businesses fall as well as aggregate demand.