Aggregate Demand

What is aggregate demand?

Aggregate demand is the desire to purchase at each possible price level. Simply means spending that includes nation’s households, businesses, and government for purchasing goods and services or investment. However, the biggest issue of businesses is a lack of consumer demand.

The real wealth effect

Consumer wealth could affect the spending because people will spend a percentage of their increased wealth. For example, an unforeseen increase in the stock market prompts consumer to save less and buy more out of their current incomes than they had planned before. As the consumer spending had increased, it will shift the aggregate demand curve rightward.

When consumers start to spend more but doesn't have much cash in hand, they will go for borrowing. This will shift the aggregate demand curve to the right as the consumer consumption is still increasing. But somehow if consumers increase their saving to pay off their debt crisis it will shift the aggregate demand curve leftward. It is because more money flowing to the debt repayment.

In my opinion, we should focus on raising the aggregate demand with employing workers or undertaking public works projects. Lack of aggregate demand or insufficient spending and investment could become a disease for businesses.

Source: http://economix.blogs.nytimes.com/2011/08/16/its-the-aggregate-demand-stupid/

Written by: Lin Chui See 0310308