Calculate aggregate demand components and economic equilibrium
Aggregate Demand (AD): Total spending in an economy at different price levels. Formula: AD = C + I + G + (X - M)
Wealth Effect: When price levels fall, real wealth increases, leading to higher consumption.
Interest Rate Effect: Lower price levels reduce interest rates, stimulating investment and consumption.
Exchange Rate Effect: Lower domestic prices make exports more competitive, increasing net exports.
AD Slope: Downward sloping due to wealth, interest rate, and exchange rate effects.