**Read this article to learn about Derivation of Aggregate Demand Curve which is explained with diagrams!**

AD curve shows negative relationship between the price level and the income level (output).

All variables of IS curve are real variables and therefore are not affected by the prices. However, when price changes e.g. falls, real money supply changes, that is, increases and thus, the LM curve is affected (shifts to right).

If price falls from P_{1} to P_{2}

Real Money supply/balances rises from M/P_{1} to M/P_{2}

**Result: **

LM curve shifts to the right from LM_{1} to LM_{2}

ADVERTISEMENTS:

RER falls from є_{1} to є_{2}

Equilibrium income level rises from Y_{1} to Y_{2}.

Plotting combination of Y_{2} and P_{2} in the lower panel (Fig. b) we get point S

ADVERTISEMENTS:

Join points R and S we get the AD curve which is negatively sloped.