Determinants of Aggregate Demand
Changes in Consumer Spending (C)
How it works
Consumer Wealth
When consumers have more money, they tend to
purchase more goods and services (and vice versa)
Consumer Expectations
When consumers expect that the economy will grow in
the future, they tend to purchase more goods and
services. If consumers expect a recession, there will be
a decrease in consumer spending
Consumer Indebtedness
When consumers own less debt (owe less money),
they tend to purchase more goods and services (and
vice versa). That’s why rising student loan debt has
been hampering real GDP growth in America
Taxes
When consumers pay less of their income in taxes
their disposable income increases. With lower taxes,
consumers will purchase more goods and services (and
vice versa)
Changes in Investment (I)
Interest Rates (i)
When interest rates are low, the cost of borrowing is
low. Consumers will be more likely to make large
purchases like cars and homes. Businesses will also
take out larger loans and purchase more capital, and
investment increases (and vice versa)
Profit Expectations
When businesses expect that profits will be positive,
they will tend to purchase more capital and investment
increases (and vice versa)
Business Taxes
When business taxes are low, businesses have more
money to re-invest in their companies. Businesses will
again tend to purchase more capital, and investment
increases (and vice versa)
Technology
Technology helps increase productivity, which
increases profit opportunities for businesses.
Businesses will tend to purchase more capital and
investment increases (and vice versa)
Changes in Government Spending
Government Spending
If government spending increases, the amount of
goods and services purchased in an economy
increases. But this does not include certain types of
government spending like transfer payments.
(Welfare, Scholarships, Social Security)
Changes in Foreign Trade (X-M)
National Income
Exchange Rates
When the income of consumers overseas increases,
they tend to import more goods and services produced
in the United States. Thus our exports rise (and vice
versa) So the success of other foreign economies isn’t
necessarily a bad thing for our domestic economic
success
When the strength of the dollar depreciates relative to
other currencies, consumers overseas tend to import
more of our goods and services produced in the United
States. Thus our exports rise (and vice versa)