3.2.1—Aggregate demand

Aggregate demand (AD) is the total planned spending on an economy’s domestic output at a given average price level: C + I + G + (X − M).

Consumption is household spending, investment is firms’ capital spending, government spending is public expenditure, and net exports are exports minus imports. AD is a flow of spending, not simply the quantity of money.

If C = 600, I = 150, G = 200, X = 100 and M = 50, then AD = 600 + 150 + 200 + (100 − 50) = 1,000. The result is spending on domestic output, so imports are subtracted.

When a question gives a component change, identify that component first; only then decide whether AD shifts. A change in the average price level itself is a movement along the AD curve.

Higher AD does not automatically mean higher wellbeing: output, prices, distribution and environmental effects may move differently.

On an AD diagram, label the vertical axis average price level and the horizontal axis real output. The AD curve slopes down: a lower price level raises the real purchasing power of wealth, tends to reduce interest rates and improves export competitiveness, increasing planned expenditure on domestic output. These mechanisms explain movement along AD; changes in $C$, $I$, $G$ or $X-M$ shift the whole curve.