Macroeconomics

‭The‬‭determinants‬‭of‬‭aggregate‬‭demand‬‭can‬‭be‬‭classifed‬‭under‬‭two‬‭main‬‭categories:‬‭direct‬‭and‬‭indirect‬ ‭components.‬ ‭Determinants of Aggregate Demand‬ ‭Direct Components of AD‬ ‭These‬ ‭determinants‬ ‭consist‬ ‭of‬ ‭the‬ ‭direct‬ ‭components‬ ‭that‬ ‭make‬ ‭up‬ ‭aggregate‬ ‭demand‬ ‭or‬ ‭output‬ ‭:‬ ‭consumption, investment, government spending, and net exports.‬

‭Let’s recall the meaning of each one and identify its effect on aggregate demand.‬

‭Table 1: Effect of Changes in Direct Components of Aggregate Demand‬ ‭Component‬ ‭Defnition‬

‭Effect on AD‬

‭↑ C →‬‭↑ AD: AD shifts to the right‬ ‭↓ C → ↓ AD: AD shifts to the left‬ ‭↑ I →‬‭↑ AD: AD shifts to the right‬ ‭↓ I → ↓ AD: AD shifts to the left‬ ‭↑ G →‬‭↑ AD: AD shifts to the right‬ ‭↓ G → ↓ AD: AD shifts to the left‬ ‭↑ X − M‬‭→‬‭↑ AD:‬‭AD shifts to the‬ ‭right‬ ‭↓ X − M →↓ AD: AD shifts to the left‬

‭Consumption Spending (C)‬ ‭The total purchases of goods‬ ‭and services by households‬

‭Investment Spending (I)‬

‭The total gross spending on‬ ‭capital goods and‬ ‭investments‬

‭Government Spending (G)‬ ‭Government expenditure on‬ ‭goods and services‬

‭Net Exports (X − M)‬

‭The difference between‬ ‭exports (X) and imports (M).‬ ‭It is positive when X > M and‬ ‭negative when X < M.‬

‭Indirect Components of AD‬

‭These consist of factors that affect the direct components, and thus aggregate demand.‬

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