What is aggregate demand? Aggregate demand refers to total expenditure in an economy in a certain period. That is, aggregate demand comprises everything that is spend in an economy in one period. One can split aggregate demand into different subcomponents. Formally, one can describe aggregate demand (Y) as
Y = C + I + G + NX
As one can see from the equation above, aggregate demand (Y) is equal consumption (C) plus investment (I) plus government spending (G) plus net exports (NX), i.e. how much we are selling abroad to other countries on net.
According to Keynesian theory, aggregate demand determines the amount of available expenditure in an economy. Now, why should one care about available expenditure? Well, in Keynesian economics, available expenditure determines the amount of means available in an economy in order to sustain labor hires in a given period. That is, in the Keynesian model, the available expenditures is what keeps people at work. Boldly speaking, Continue reading Aggregate Demand