Aggregate Demand

MACRO
ECONOMICS
SUBMITTED TO: MA’AM ZOHRA ALY
AGGREGATE DEMAND
SUBMITTED BY:
 SYEDA ALIZEH RASHDI (12529)
 MUSKAN MAHNOOR (12842)
 ASRA MUSTAFA (13049)
 SABAB SIDDIQUE (12537)
 SHAFAQ SULTANA (11811)
 SIKANDAR AZAM (64227)
ACKNOWLEDGEMENT
Presentation inspiration and motivation

have always played a key role in the
success of any venture.
We would like to express our special
thanks of gratitude to our Ma’am Zohra
Aly, who gave us the golden opportunity
to do this wonderful project of macro
economics. We came to know about so
many new things I am really thankful to
them. Secondly, we would also like to
thank my parents and friends who helped
us a lot in finalizing this project within
the limited time frame.
INTRODUCTION
Aggregate demand is a macroeconomic term that represents the total
demand for goods and services at any given price level in a given
period. Aggregate demand over the long term equals gross domestic
product (GDP) because the two metrics are calculated in the same way.
GDP represents the total amount of goods and services produced in an
economy while aggregate demand is the demand or desire for those
goods. As a result of the same calculation methods, the aggregate
demand and GDP increase or decrease together.
Technically speaking, aggregate demand only equals GDP in the long

run after adjusting for the price level. This is because short-run
aggregate demand measures total output for a single nominal price level
whereby nominal is not adjusted for inflation. Other variations in
calculations can occur depending on the methodologies used and the
various components.
Aggregate demand consists of all consumer goods, capital

goods (factories and equipment), exports, imports, and government
spending programs. The variables are all considered equal as long as
they trade at the same market value.
AGGREGATE DEMAND
Aggregate demand is a measurement of the total amount of demand for
all finished goods and services produced in an economy. Aggregate
demand is expressed as the total amount of money exchanged for those
goods and services at a specific price level and point in time.
 Aggregate demand measures the total amount of demand for all

finished goods and services produced in an economy.
 Aggregate demand is expressed as the total amount of money
spent on those goods and services at a specific price level and
point in time.
 Aggregate demand consists of all consumer goods, capital goods
(factories and equipment), exports, imports, and government
spending.
Aggregate Demand Curve
If you were to represent aggregate demand graphically, the aggregate

amount of goods and services demanded would be placed on the
horizontal X-axis, and the overall price level of the entire basket of
goods and services would be represented on the vertical Y-axis.
The aggregate demand curve, like most typical demand curves, slopes

downward from left to right. Demand increases or decreases along the
curve as prices for goods and services either increase or decrease. Also,
the curve can shift due to changes in the money supply, or increases and
decreases in tax rates.
WHY AGGREGATE DEMAND SLOPES
DOWNWARDS?
The aggregate demand (AD) curve slopes downward because output
decreases as the price level increases.
Increases or decreases in autonomous spending components can shift the
AD curve. Through policy changes, the government can also shift the
AD curve.
Why is AD curve downwardly sloping?
Increased spending power. At a lower price level, consumers are likely
to have higher disposable income and therefore spend more. (Note this
assumes that wages are constant and not falling with prices)
Increase in demand for exports. If there is a lower price level in the UK,
UK goods will become relatively more competitive, leading to higher
exports. Exports are a component of AD, and therefore AD will be
higher.
Lower interest rates. At a lower price level, interest rates usually fall,
and this causes higher aggregate demand.
Calculating Aggregate Demand

The equation for aggregate demand adds the amount of consumer
spending, private investment, government spending, and the net of
exports and imports. The formula is shown as follows:
Aggregate Demand=C+I+G+Nx
where:
C=Consumer spending on goods and services
I=Private investment and corporate spending on
non-final capital goods (factories, equipment, etc.)
G=Government spending on public goods and social

services (infrastructure, Medicare, etc.)
Nx=Net exports (exports minus imports)
Factors That Influence Aggregate Demand

A variety of economic factors can affect the aggregate demand in an
economy. Key ones include:
Interest Rates:
Whether interest rates are rising or falling will affect decisions made by
consumers and businesses. Lower interest rates will lower the borrowing
costs for big-ticket items such as appliances, vehicles, and homes. Also,
companies will be able to borrow at lower rates, which tends to lead to
capital spending increases. Conversely, higher interest rates increase the
cost of borrowing for consumers and companies. As a result, spending
tends to decline or grow at a slower pace, depending on the extent of the
increase in rates.
Income and Wealth:
As household wealth increases, aggregate demand usually increases as
well. Conversely, a decline in wealth usually leads to lower aggregate
demand. Increases in personal savings will also lead to less demand for
goods, which tends to occur during recessions. When consumers are
feeling good about the economy, they tend to spend more leading to a
decline in savings.
Inflation Expectations:
Consumers who feel that inflation will increase or prices will rise, tend
to make purchases now, which leads to rising aggregate demand. But if
consumers believe prices will fall in the future, aggregate demand tends
to fall as well.
Currency Exchange Rates:
If the value of the U.S. dollar falls (or rises), foreign goods will become
more (or less expensive). Meanwhile, goods manufactured in the U.S.
will become cheaper (or more expensive) for foreign markets. Aggregate
demand will, therefore, increase (or decrease).
What Factors Affect Aggregate Demand?
Aggregate demand can be impacted by a few key economic factors.
Rising or falling interest rates will affect decisions made by consumers
and businesses. Rising household wealth increases aggregate demand
while a decline usually leads to lower aggregate demand. Consumers'
expectations of future inflation will also have a positive correlation on
aggregate demand. Finally, a decrease (or increase) in the value of the
domestic currency will make foreign goods costlier (or cheaper) while
goods manufactured in the domestic country will become cheaper (or
costlier) leading to an increase (or decrease) in aggregate demand.
What Are Some Limitations of Aggregate Demand?

While aggregate demand is helpful in determining the overall strength of
consumers and businesses in an economy, it does pose some limitations.
Since aggregate demand is measured by market values, it only represents
total output at a given price level and does not necessarily represent
quality or standard of living. Also, aggregate demand measures many
different economic transactions between millions of individuals and for
different purposes. As a result, it can become challenging when trying to
determine the causes of demand for analytical purposes.
What's the Relationship Between GDP and Aggregate

Demand?
GDP (gross domestic product) measures the size of an economy based
on the monetary value of all finished goods and services made within a
country during a specified period. As such, GDP is the aggregate supply.
Aggregate demand represents the total demand for these goods and
services at any given price level during the specified period. Aggregate
demand eventually equals gross domestic product (GDP) because the
two metrics are calculated in the same way. As a result, aggregate
demand and GDP increase or decrease together.

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MACRO

Presentation inspiration and motivation

Technically speaking, aggregate demand only equals GDP in the long

Aggregate demand consists of all consumer goods, capital

 Aggregate demand measures the total amount of demand for all

Aggregate Demand Curve

If you were to represent aggregate demand graphically, the aggregate

The aggregate demand curve, like most typical demand curves, slopes

Calculating Aggregate Demand

G=Government spending on public goods and social

Factors That Influence Aggregate Demand

What Are Some Limitations of Aggregate Demand?

What's the Relationship Between GDP and Aggregate

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