Test Your Knowledge on Aggregate Demand

Aggregate Demand: Key Facts and Figures

• Aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time.

• Consumer spending, investment, corporate and government expenditure, and net exports make up the aggregate demand.

• The aggregate demand curve is plotted with real output on the horizontal axis and the price level on the vertical axis.

• The slope of the curve is derived with the help of three macroeconomic assumptions about the functioning of markets: Pigou's wealth effect, Keynes' interest rate effect, and the Mundell–Fleming exchange-rate effect.

• The Mundell–Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output.

• There are many factors that can shift the AD curve. Rightward shifts result from increases in the money supply, in government expenditure, or in autonomous components of investment or consumption spending, or from decreases in taxes.

• According to the aggregate demand-aggregate supply model, when aggregate demand increases, there is movement up along the aggregate supply curve, giving a higher level of prices.

• John Maynard Keynes argued during the Great Depression that the loss of output by the private sector as a result of a systemic shock ought to be filled by government spending.

• An aggregate demand curve is the sum of individual demand curves for different sectors of the economy.

• The aggregate demand is usually described as a linear sum of four separable demand sources:

  • consumer spending,
  • investment spending,
  • government spending, and
  • net exports.

• In these diagrams, typically the aggregate quantity demanded rises as the average price level falls, as with the AD line in the diagram.

• Aggregate supply can help determine the extent to which increases in aggregate demand lead to increases in real output or instead to increases in prices (inflation).Aggregate Demand and Debt in Economics

• Short-term relationship between the economy and Aggregate Supply (AS) curve

• AS curve unlikely to shift down or to the right at low levels of real output (Y)

• Post-Keynesian theory of aggregate demand emphasizes the role of debt, referring to it as the credit impulse

• Spending is related to income and borrowing

• Changes in debt growth have significant impact on aggregate demand

• The economy becomes more sensitive to debt dynamics as the level of debt grows

• Credit bubbles cause shrinkage of credit, resulting in a drop in aggregate demand

• Aggregate demand falls short of income when the level of debt stops rising and instead starts falling

• Government deficit spending replaces private debt with public debt in the face of an economic crisis

• Austrian theorists argue that aggregate demand is a meaningless concept in economic analysis, and recessions are caused by micro-economic factors.