Aggregate Demand

• Aggregate demand(AD)


  Value of all goods and services demanded in an economy in a given time period; Calculated through total spending
• 1. Households → Consumption, C
  2. Firms → Investment, I
  3. Government → Government spending, G
  4. Foreigners → Net exports = Exports - Imports, X - M
• AD = C + I + G + (X - M)
• Wealth effect


  As price level decreases, households feel wealthier and consume more, increasing aggregate demand. Vice versa.
• Real interest rate effect


  As price level increases, banks increase the interest rate. As a result, borrowers demand less loans. Vice versa.
• Net export effect


  As price level increases, foreigners demand less of exports, decreasing aggregate demand. Vice versa.
• As consumption increases, the aggregate demand curve shifts to the right. Vice versa.
• As investment increases, the aggregate demand curve shifts to the right. Vice versa.
• As taxation decreases, there is an increase in consumption and investment. Vice versa.
• As government spending increases, aggregate demand increases. Vice versa.
• As exports increase, aggregate demand increases.
• As imports increase, aggregate demand decreases.
• Determinants of AD

  Consumption

  • Consumer confidence
  • Interest rates
  • Wealth
  • Income taxes
  • Level of household indebtness
  • Expectations of future price levels
• Determinants of AD

  Investment

  • Interest rates
  • Business confidence
  • Technology
  • Business taxes
  • Level of corporate indebtness
• Determinants of AD

  Government spending

  • Political priorities
  • Economic priorities
• Determinants of AD

  Net exports

  • Income of trading partners
  • Exchange rates
  • Trade policies
• Increase in aggregate demand

  
• Decrease in aggregate demand