Aggregate Demand
Aggregate demand refers to the total demand for goods and services within an economy at a given price level and in a specific time period. It is determined by the combined spending of households, businesses, government, and foreign buyers. Changes in aggregate demand can impact an economy's output, employment, and price levels.
6 Key excerpts on "Aggregate Demand"
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Recall that the total amount of final goods and services can be divided into the amounts spent for consumption, investment, government purchases, and net exports. The aggregate quantity demanded is the quantity of final output that buyers will purchase at a given price level. As seen in Figure 12.1, the Aggregate Demand curve may look like a market demand curve, but it’s really different. Instead of showing the relationship between the price and quantity demanded of a single good—say, motorcycles—the Aggregate Demand curve describes the relationship between the price level and the aggregate quantity of all final goods and services demanded in the economy. Movements along the Aggregate Demand Curve Referring to Figure 12.1, notice that the Aggregate Demand curve is downward-sloping. As the price level falls, all else being equal, the total amount of final goods and services purchased rises. What explains this relationship? The price level is a determinant of the amount of money demanded. As the price level declines, households need to hold less money to purchase the goods and services they desire. Households thus try to decrease their holdings of money by lending it out as the price levels fall. For example, a household might place its excess money in an interest-bearing savings account at a bank. The increased supply of savings drives interest rates downward, thereby encouraging borrowing by households that wish to invest in new housing or by businesses that want to invest in new plant and equipment. Put simply, a lower price level decreases interest rates, which results in additional spending on investment goods and thus increases the aggregate quantity of goods and services demanded. 3 3 This explanation of the downward-sloping Aggregate Demand curve is known as the interest rate effect...
eBook - ePubEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...The economy always ends up at the equilibrium price level and real GDP where AD = AS. Next, we turn to more details regarding the Aggregate Demand and aggregate supply curves. Aggregate Demand (AD) is the total quantity of output (of goods and services) demanded by all sectors in the economy at various price levels. Aggregate Demand is made up of five components: consumption (C), investment (I), government spending (G), exports (X), and imports (IM). A D = C + I + G + X − I M. Consumption refers to consumer purchases of goods and services. Investment refers to businesses’ purchases of investment goods and services, such as machinery, equipment, and construction services that expand the physical size of businesses’ operations. Government spending includes all government purchases of goods and services, such as the services of soldiers and teachers, the construction of roads, and so on. Exports refers to foreign purchases of domestically produced goods and services, such as U.S. exports to Europe. Imports refers to domestic purchases of foreign-produced goods and services, such as U.S. imports from Europe. Note that imports are subtracted from Aggregate Demand because increased spending on imports means that less money is spent in the domestic economy. Slope of Aggregate Demand. The Aggregate Demand curve slopes downward because of three effects: The real balance effect: Higher prices mean less real wealth for consumers, causing consumers to spend less. Similarly, lower prices increase consumers’ purchasing power, leading to increases in consumer spending. The real interest rate effect: Higher prices cause real interest rates to rise because firms and individuals need to borrow more money to pay for more expensive goods. This results in decreases in spending on goods purchased with borrowed funds, including consumers’ purchases of houses and cars and businesses’ purchases of investment goods. The foreign trade effect: Higher prices on U.S. goods and services makes U.S...
eBook - ePub- W. Charles Sawyer, Richard L. Sprinkle(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...This depreciation of the dollar causes foreign purchases of U.S. goods and services (exports) to increase and U.S. purchases of foreign goods and services (imports) to decline. These effects cause an increase in Aggregate Demand. In the opposite case, an appreciation of the dollar causes an increase in imports and a reduction in exports. This in turn causes a decrease in Aggregate Demand. Since exports are 8 percent of GDP and imports are 12 percent of GDP for the U.S., the effects of changes in income and the exchange rate have become more than trivial determinants of Aggregate Demand. 7 Table 16.1 provides a list of factors that can cause the Aggregate Demand curve to increase or decrease. TABLE 16.1 Determinants or factors that shift the Aggregate Demand curve Change in consumption spending Change in consumer wealth Change in consumer expectations Change in consumer indebtedness Change in taxes Change in investment spending Change in interest rates Change in business expectations Change in business taxes Change in government spending Change in federal, state, and local government spending Change in exports and imports Change in foreign income Change in exchange rates AGGREGATE SUPPLY Aggregate Demand, or total spending, is only one side of the output market. In order to determine the equilibrium price level and equilibrium level of total output (GDP) for an open economy, we need to describe total production (or supply) of goods and services. Aggregate supply is the relationship between the total quantity of goods and services an economy produces at various price levels, holding all other determinants of production unchanged...
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...If the statistical information is available, it is useful in verifying such relationships, but the relationships themselves are usually asserted to exist on other than purely statistical grounds. Since the concept of Aggregate Demand is required for this kind of purpose rather than for detailed factual prediction (in the present context, at any rate), the lack of detailed information about it need not prevent it from being extremely useful. It can be argued, moreover, that in a good many situations there will be a very close correspondence between the figures of National Expenditure and those that would appear (if they were known) in a detailed statement of Aggregate Demand. Consumers, for example, can be assumed to spend whatever amounts they wish (given the prices of commodities, their own incomes, and so on) unless for some reason the available quantities of the commodities they desire are inadequate to meet their demands – in which case some of the spending that consumers wish to do will not in fact be done. If, on the other hand, commodities are in plentiful supply, consumers will buy what they want and leave the rest of the available commodities in the hands of the sellers. In short, consumers’ actual expenditure conceivably may fall short of their intended expenditure, but it cannot exceed it. This is true also of government expenditure, of the purchase of imports and exports, and of expenditure on fixed capital equipment; in all these cases, buyers may have to make do with less than they would have liked to purchase, but they cannot be made to buy more than they want...
eBook - ePubMacroeconomic Theory: A Short Course
A Short Course
- Thomas R. Michl(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...When we aggregate over all the goods, we are considering a simultaneous increase in all the prices, so that all the relative prices remain constant. That is why an Aggregate Demand curve cannot be formed by simply adding up all the individual demand curves. We will see that nonetheless, macroeconomic theory does suggest reasons of a purely macroeconomic nature for the existence of an Aggregate Demand curve, but the Aggregate Demand curve can be vertical or even positively sloped, even when individual demand curves have their usual negatively sloped shape. This illustrates why macroeconomics is more than an extension of microeconomics: the whole is often different from the sum of its parts. Aggregating the pricing equation over all the firms results in an aggregate pricing equation P = (1 + μ) W which, once again, tells us that as long as the wage is fixed, firms will charge the same price no matter how much demand they experience for their products. Again, it is conventional to call the horizontal line at the price given by this equation the aggregate supply curve, although it would be more accurate to call it the aggregate price curve. When we drop the assumption that wages are constant in later chapters, we will find that the aggregate supply curve may slope upward. Just as we can find the profit share at the firm level from the mark-up, so too can we find the aggregate profit share, Π/ Y, which will be equal to μ /(1 + μ) Aggregating the production function over all the firms results in an aggregate production function 4. 4 The constant y − 1, which is left implicit, has the dimension constant dollars per worker per year to ensure that the production function is dimensionally consistent. Y = N Obviously, if firms choose to expand output, they must hire more units of labor. In practice, this can be accomplished through longer hours per worker, or through hiring...
eBook - ePubCoping with Global Unemployment
Putting People Back to Work
- John Eatwell(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...This has meant a loss of high-paying jobs. Public infrastructure has not kept pace with the growth of GNP. OECD figures show a decline in the public capital stock relative to GDP from a peak of 52 percent in the late 1960s to 42 percent in 1990. Gross public investment has similarly turned down (OECD, 1993, p. 75). Investment depends on the growth of consumption. But on the other hand, consumption depends on investment, since investment creates jobs in the long run and has multiplier effects on income in the short. Thus, the slowdown and increased volatility in each will tend to reinforce those developments in the other. However, these are not the only components of Aggregate Demand—net exports and government spending will affect incomes and therefore influence consumption; they also could directly influence investment. But we shall see that neither exercised a stabilizing influence. Figure 7.4 Net Exports (billions of 1987$) Net Exports In principle, foreign trade should be stabilizing. Suppose that at full employment (which should also be full capacity utilization) X - mY = 0. Exports, X, will be exogenous; 0 ≤ m ≤ 1 will be the import coefficient. Hence, when aggregate output, Y, rises above the full employment level, the trade balance will turn negative, reducing demand pressure, and when Y falls below full employment, the trade balance will move into surplus, providing a stimulus. In the Golden Age this almost seemed to be the case. During the first half of the postwar era, net exports provided a small but positive stimulus to the economy. Beginning in the early 1970s, however, this stimulus vanished, reappeared, and then in the mid-1970s disappeared with a vengeance. From then on, net exports were negative, providing a drag on the economy, although they also fluctuated a great deal (see Figure 7.4). Net exports of consumer durables and nondurables followed very similar patterns...
