Other variations in calculations can occur depending on methodological variations or timing issues in gathering statistics. Aggregate demand is by its very nature general, not specific. All consumer goods , capital goods , exports, imports and government spending programs are considered equal so long as they traded at the same market value. If you were to represent aggregate demand graphically, the aggregate amount of goods and services demanded is represented on the horizontal X-axis, and the overall price level of the entire basket of goods and services is 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. Boosting aggregate demand also boosts the size of the economy regarding measured GDP.
However, this does not prove that an increase in aggregate demand creates economic growth. Since GDP and aggregate demand share the same calculation, it only echoes that they increase concurrently. The equation does not show which is the cause and which is the effect. Early economic theories hypothesized that production is the source of demand. The 18th-century French classical liberal economist Jean-Baptiste Say stated that consumption is limited to productive capacity and that social demands are essentially limitless, a theory referred to as Say's law.
Say's law ruled until the s, with the advent of the theories of British economist John Maynard Keynes. Keynes, by arguing that demand drives supply, placed total demand in the driver's seat.
Keynesian macroeconomists have since believed that stimulating aggregate demand will increase real future output. According to their demand-side theory, the total level of output in the economy is driven by the demand for goods and services and propelled by money spent on those goods and services.
In other words, producers look to rising levels of spending as an indication to increase production. Keynes considered unemployment to be a byproduct of insufficient aggregate demand because wage levels would not adjust downward fast enough to compensate for reduced spending. He believed the government could spend money and increase aggregate demand until idle economic resources, including laborers, were redeployed.
Other schools of thought, notably the Austrian School and real business cycle theorists, hearken back to Say. They stress consumption is only possible after production. This means an increase in output drives an increase in consumption, not the other way around. Any attempt to increase spending rather than sustainable production only causes maldistributions of wealth or higher prices, or both.
Keynes further argued that individuals can end up damaging production by limiting current expenditures — say, by hoarding money. Other economists argue that hoarding changes prices but does not necessarily change capital accumulation , production or future output. If the price of autos were to suddenly fall the increase in demand would be readily met by recalling laid-off workers and running more machines for longer periods of time.
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These are terms from Chapter 29 Aggregate Demand and Aggregate Supply, from the book Macroeconomics 19th edition by McConnel, Brue, and Flynn. Start studying Determinants of Aggregate Supply and Aggregate Demand.. Learn vocabulary, terms, and more with flashcards, games, and other study tools.
Explain how the three major determinants of aggregate supply (and their underlying factors) can increase or decrease aggregate supply. Show the effects of an increase in aggregate demand on the real output and the price level and relate the changes to demand- pull inflation. Start studying Chapter 30 Aggregate Demand and Aggregate Supply. Learn vocabulary, terms, and more with flashcards, games, and other study tools.