Question

What is aggregate demand and what factors impact the Aggregate Demand. Provide, current examples (at least three factors) that impact the direction of aggregate demand for the US economy.

Answer 1

Aggregate demand is defined as the total demand for an economy’s goods and services. It consists of consumption, Investment, government spending and net exports. The factors include all those which affect the levels of components of aggregate demand

The three factors are:
1. Interest rates: A decrease in interest rate would lead to higher disposable income which increases consumption and hence shifts the AD curve to right
2. Supply of money: Increase in supply of money would increase the demand for goods and hence consumption, investment
3. Decrease in taxes: This would increase income which would increase consumption and hence the AD curve