Aggregate Demand AD
Definition of Aggregate Demand. Aggregate Demand is the total planned (ex ante) level of spending on goods and services within an economy.
Formula for Aggregate Demand. AD=C+I+G+X-M.
- where C= Consumption, I = investment, G= government spending, X= exports and M = Imports.
- In the Keynesian model, Aggregated Demand is said to be equivalent to Total Expenditure (E)
- A rise in Aggregate Demand is a necessary condition for a rise in Real National Output. However, if the economy is at full Capacity (inelastic LRAS) then an increase in AD may not increase real output.
Diagram showing rise in Aggregate Demand
Aggregated Demand is lower at a higher price level because:
- A higher price level reduces the effective purchasing power of a consumer's budget
- At a higher price level interest rates tend to be higher to reduce inflation
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