Aggregate Demand

Understanding Aggregate Demand

Aggregate demand is the total demand for all finished goods and services in an economy at a specific price and time.

It represents the total amount of money exchanged for these goods and services.

Aggregate demand is the sum of purchases made by firms, households, government, and foreign buyers through exports, minus the demand satisfied by foreign producers through imports.

Factors Influencing Aggregate Demand from a Keynesian Perspective

According to Keynesian economists, aggregate demand is influenced by consumer spending and investment levels.

If consumers are inclined to spend rather than save and firms are motivated to invest, aggregate demand will increase.

Conversely, if consumers prefer saving, aggregate demand will be low, and firms will be hesitant to invest; aggregate demand will be low spending regarding leakages (savings, taxes, imports) and injections (investment, government spending, exports).

When aggregate demand is low, the government can intervene by injecting more spending or reducing leakages through tax cuts.