 Now, we're going to introduce a new model, the aggregate demand aggregate supply model. Economists like this model because they like to put everything into a supply and demand framework. And even though that is mostly appropriate for microeconomics, there's also a macroeconomic analog to that, and that's what we'll talk about now. Let's start with aggregate demand. Aggregate demand shows the relationship between the price level, that is how much things cost on average for the whole economy on the one hand, and the total aggregate demand on the other hand. So the relationship between the price level and aggregate demand. And here's the main idea. What happens to desired expenditure, planned expenditure, when the price level falls? Well, here's the theory. When price level falls, people's real wealth goes up. If you have money in your pocket, $100, say, in your pocket, and prices are cut in half, then your money can buy twice as much as it could before. Your wealth has doubled, and so the idea is you'll go out and consume more, buy more beer, buy more clothes, buy more something. So how can we represent that on the graph? Well here we have planned expenditure before prices fall. Now if prices fall, let's say prices go down from P0 to P1 in the economy as a whole, then your wealth goes up. If your wealth goes up, your desired expenditure goes up. So the planned expenditure line will shift up. And when your planned expenditure goes up, that means your aggregate demand or your demand goes up to here, and output demanded in the economy will expand. So let's show that on the aggregate demand price graph. So let's say we have P on the vertical axis and GDP on the horizontal axis. What did I just show you? What I showed you is that when the prices go down, demand goes up. And we can draw that line like that, when prices go down, GDP or demand for GDP goes up. Voila!