Question

What is aggregate demand? What are its components?

why is the aggregate demand curve downward sloping?

What shifts the aggregate demand curve?

What is aggregate supply?

Answer 1

Answer : 1) The total demand of final goods and services of an economy for a given year is known as aggregate demand. The aggregate demand has 4 components. These 4 components are : consumption (C), investment (I), government spending (G) and net export (NX).

2) The aggregate demand curve shows the relationship between price and real GDP. There exist a negative relationship between price and real GDP. This means that if price rise then real GDP decrease and if price fall then real GDP increase. Hence the aggregate demand curve is downward sloping.

3) The 4 components of aggregate demand are : consumption (C), investment (I), government spending (G) and net export (NX). Changes of these components shift the aggregate demand curve.

For example; if consumption increase then aggregate demand increase which shift the aggregate demand curve to rightward. Similarly, if consumption decrease then the aggregate demand decrease which shift the aggregate demand curve to leftward. Similarly, the shifting of aggregate demand curve depends on investment, government spending and net export.

4) The total supply of final goods and services of an economy for a given year is known as aggregate supply.