Determinants of Aggregate Demand

"Anything that changes anyh one of these components will also change aggregate demand".
  1. Changes in Consumption
  2. Changes in Investment
  3. Changes in Net Exports
  4. Changes in Government Sector
Changes in Consumption
  • change in wealth (wealth effect) ex. stock market is doing well > wealth increases > consumption spending increases
  • change in prices (real balances effect) ex. price decreases > value of savings increases > savings decrease > autonomous consumption increases
  • change in the age of durable goods ex. fridge breaks > autonomous consumption increases
  • change in consumer expectations ex.loss of job > autonomous consumption decreases

Changes in Investment
  • change in interest rates
  • changes in the prices of capital goods
  • change in the age of capital goods
  • amount of spare capacity
  • business expectations
  • government regulations

Changes in Net Exports
  • changes in domestic prices compared to other countries
  • change in the exchange rate
  • change in income levels abroad
  • change in foreign tastes

Export spending is independent of national income

Import spending is dependent on national income

Changes in Government Sector
Government spending in assumed to be autonomous of income

1. John E. Sayre and Alan J. Morris, Principles of Macroeconomics (Toronto: McGraw-Hill Ryerson, 2009), 175-178
2. Dr. Stephanie Powers, "Aggregate Demand" (lecture, Red Deer College, AB, March 5, 2012)