Aggregate Demand GapFill

Aggregate demand is a central macroeconomic concept. It is important that you are familiar with the key components of aggregate demand and their influences, causes of rises and falls in aggregate demand, and diagrammatic representations of aggregate demand.

There are five key components that contribute to aggregate demand. The first,  Borrowing (B)Investment (I)Exports (X)Consumption (C), represents the level of general spending in the economy, and in most countries is the largest contributor. The second,  Government (G)Exports (X)Borrowing (B)Investment (I), represents the contribution of firms to aggregate demand. The third,  Borrowing (B)Imports (M)Consumption (C)Government (G), represents spending on public services and public capital spending. The fourth and fifth,   Government (G)Imports(M)Investment (I)Exports (X) and  Borrowing (B)Consumption (C)Exports (X)Imports (M), represent the economy's trade revenues and trade costs respectively. Together this creates the formula  B + C + I + X – GG + C + I + X – BC + I + G + X + MC + I + G + X – M, the sum of which enables us to quantify the general level of aggregate demand in the economy.

Shifts in aggregate demand can be represented using a demand curve, where the general price level is represented on the y-axis, and the economy’s gross domestic product is represented on the x-axis.. Measuring shifts in aggregate demand is critical in the management of  employmentinflationeconomic growththe economic cycle between periods of boom and recession.