Aggregate demand consists of Consumption (C), Investment (I), Government spending (G), Exports (X) and Imports (M)
AD = C + I + G + (X – M)
Definition: Aggregate demand is the total demand for goods and services in an economy at different price levels.
Explanation of why AD is downward sloping:
- As prices rise, demand for economy’s goods and services decreases. Goods become less competitive internationally and people’s real income falls.
AD will shift if any of its components (C, I, G, X, M) change.
Consumption is affected by:
- Consumer Confidence
- Interest rates
- Personal Income taxes
- Household indebtedness
- Wealth
Investment is affected by:
- Interest rates
- Business confidence
- Technology
- Business taxes
- Level of corporate indebtedness
Government spending is affected by political and economic priorities.
Exports and Imports are affected by:
- Income of trading partners
- Exchange rates
- Changes in the level of protectionism
- Relative inflation rates
Find everything you need to know about aggregate supply here
