Shahid Ullah Macro Economics ID: 14007

define aggregate demand and show what factors determine AD and how?

Aggregate Demand:
Aggregate demand (AD) refers to the total quantity of goods and services demanded by an
economy at a given overall price level and in a given period. It represents the total spending on
an economy's output of goods and services. Aggregate demand is a key concept in
macroeconomics and is often represented by the aggregate demand curve, which shows the
relationship between the overall price level and the quantity of goods and services demanded by
households, businesses, the government, and foreign buyers.
The components of aggregate demand include:
1. Consumption (C): This is the total spending by households on goods and services. It is
influenced by factors such as disposable income, consumer confidence, and interest rates.
Higher disposable income and confidence generally lead to increased consumption.
2. Investment (I): Investment represents the spending by businesses on capital goods, such
as machinery and buildings. Factors influencing investment include interest rates,
business confidence, and expectations about future economic conditions. Lower interest
rates, high confidence, and positive expectations often lead to increased investment.
3. Government Spending (G): This component represents the spending by the government
on goods and services. Changes in government spending policies can impact aggregate
demand. For example, an increase in government spending can boost overall demand,
while a decrease can have the opposite effect.
4. Net Exports (Exports - Imports): This component represents the difference between a
country's exports and imports. It depends on factors such as exchange rates, trade
policies, and global economic conditions. A depreciation of the domestic currency, for
example, can make exports cheaper and boost net exports.
The formula for aggregate demand is:
AD=C+I+G+(X−M)
where:
 C is consumption,
 I is investment,
 G is government spending,
 X is exports, and
 M is imports.

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Shahid Ullah Macro Economics ID: 14007

Factors that determine aggregate demand:

1. Interest Rates: Changes in interest rates can influence consumption and investment.
Lower interest rates tend to encourage borrowing and spending, leading to an increase in
aggregate demand.
2. Consumer Confidence: The confidence that consumers have in the economy can affect
their willingness to spend. Higher confidence levels generally lead to increased
consumption.
3. Government Policies: Government spending and taxation policies can impact aggregate
demand. For example, an increase in government spending can boost demand, while tax
cuts can increase disposable income and consumption.
4. Exchange Rates: Changes in exchange rates can affect a country's exports and imports,
influencing the net export component of aggregate demand.
5. Global Economic Conditions: The overall health of the global economy can impact a
country's exports and influence aggregate demand.

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