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By the end of this section, you will be able to:
  • Explain how imports influence aggregate demand
  • Identify ways in which business confidence and consumer confidence can affect aggregate demand
  • Explain how government policy can change aggregate demand
  • Evaluate why economists disagree on the topic of tax cuts

As mentioned previously, the components of aggregate demand are consumption spending (C), investment spending (I), government spending (G), and spending on exports (X) minus imports (M). (Read the following Clear It Up feature for explanation of why imports are subtracted from exports and what this means for aggregate demand.) A shift of the AD curve to the right means that at least one of these components increased so that a greater amount of total spending would occur at every price level. A shift of the AD curve to the left means that at least one of these components decreased so that a lesser amount of total spending would occur at every price level. The Keynesian Perspective will discuss the components of aggregate demand and the factors that affect them. Here, the discussion will sketch two broad categories that could cause AD curves to shift: changes in the behavior of consumers or firms and changes in government tax or spending policy.

Do imports diminish aggregate demand?

We have seen that the formula for aggregate demand is AD = C + I + G + X - M, where M is the total value of imported goods. Why is there a minus sign in front of imports? Does this mean that more imports will result in a lower level of aggregate demand?

When an American buys a foreign product, for example, it gets counted along with all the other consumption. So the income generated does not go to American producers, but rather to producers in another country; it would be wrong to count this as part of domestic demand. Therefore, imports added in consumption are subtracted back out in the M term of the equation.

Because of the way in which the demand equation is written, it is easy to make the mistake of thinking that imports are bad for the economy. Just keep in mind that every negative number in the M term has a corresponding positive number in the C or I or G term, and they always cancel out.

How changes by consumers and firms can affect ad

When consumers feel more confident about the future of the economy, they tend to consume more. If business confidence is high, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial. Conversely, if consumer or business confidence drops, then consumption and investment spending decline.

The University of Michigan publishes a survey of consumer confidence and constructs an index of consumer confidence each month. The survey results are then reported at (External Link) , which break down the change in consumer confidence among different income levels. According to that index, consumer confidence averaged around 90 prior to the Great Recession, and then it fell to below 60 in late 2008, which was the lowest it had been since 1980. Since then, confidence has climbed from a 2011 low of 55.8 back to a level in the low 80s, which is considered close to being considered a healthy state.

Questions & Answers

what is scarcity
Edmore Reply
Scarcity is the limitedness of resources relative to human wants. In economic sense means that the available resources are not sufficient to satisfy all human wants.
Innocent
Moreover, Fiscal policy deal with government revenue and expenditure. Government expenditure puts money in public hands while government revenue withdraws the money. Role of fiscal policy is to reduces money circulation as a means of reducing demand.
Innocent
What is an inflationary spiral?
Innocent
Suppose that you 're nominated as a Minister of Finance in your country's. How can you finance a deficit budget?
Innocent
Can you explain the terms 'fiscal deficit' and 'fiscal policy'?
Brahmani Reply
fiscal deficit refers to the government expenditure exceed expected to the government revenue
Innocent
fiscal deficit is like budget deficit
Innocent
fiscal policy it occurs when the government takes and maintain the strategic to resolve the inflation.
Innocent
What is inflation?
Braa Reply
increase in general price level
suresh
a sudden increase in prices of goods that effects our cost of living
Brahmani
what is Debenture in economy
Gideon Reply
what is economic
Vida Reply
Economic is a seines which study the human behavior as ends and scarce means which have alternative uses
Debrah
Economics is the study of how human make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions.
Wandji
Economics is a science that study human behaviour as a relationship between ends and scarce means which may have alternative uses.
Elizabeth
in my opinion, economics helps us to learn decision making not only in short term but in long term too
shubham
What is Debenture in economy
Gideon
what is special directives
Emmanuel Reply
what is demand
Joseph Reply
Demand simply refers to the amount of goods and services which the consumer is willing and able to purchase at each price
Owusu
Demand refers to the quantity of goods and services an individial is willing and able to purchase or buy at various price over a period of time
Elizabeth
what is mean by unitary elastic demand
Bangniyel Reply
demand is said to be unitary elastic when the percentage change in the demand is equal to the percentage change in the price
George
what is the principle of equi-marginal utility
Reliance Reply
what is Economics and it important
Anita Reply
what is production
Anita
what is Economic
Anita Reply
what is the meaning of Economic
Anita
economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
Boso
I don't know.
natchanan
u don't
Ssali
@ Boso thanks for the definition ✌
Raewyn
boso u r too much u try
Liambee
ya nyc
Ssali
Thanks kk
Anita
pls can I ask more questions
Anita
what is production
Anita
production is creation of goods and services
George
what is macroeconomics and microeconomics
Anita
macroeconomics deals with larger economic units such as GDP,GNP,employment while microeconomics deals with smaller economic units such firm and household
George
Thanks
Anita
Explain the ff Scarcity Ends Demand Supply Choice Scale of preference
Anita
macroeconomics deals with larger economic units such as GDP,GNP,employment while microeconomics deals with smaller economic units such firm and household
George
Gross Domestic product...it represent the total value of the products produced within the country including foreign industries
George Reply
what is products
Anita
what are the favourable demand
Odia Reply
list of climate that affect demands
Odia
What is two major forms of international trade?
Musa Reply
What is Economics and why it is important
Abdul Reply
De ans,Economics is the study of women behavior as a relationship between end and scared mean which have alternative uses.
Anita

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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