What Causes Decreases in Aggregate Demand?

Aggregate demand (AD) is a macroeconomic concept. Refers to the sum of the demand for final goods and services in the economic system (Y) for a specified period and prices. This is the total amount of goods and services that will be consumed at any possible price level in an economic system. This is the demand for gross domestic product when a country's inventory level is static. It is also often called effective demand, although the term is otherwise distinguished. Although it is right to analyze a single item in microeconomics, this idea is not correct at the macro level. In fact, the aggregate demand curve slopes down to the right because of three different effects: the Pigou effect, the Keynesian interest rate effect, and the Mundell-Fleming exchange rate effect. The total purchasing power of a country or region for products and services in a certain period of time (usually one year) which is actually formed by socially available investment and consumption expenditures. It depends on the overall price level and is affected by factors such as domestic investment, net exports, government spending, consumption levels and money supply. In simple terms, it generally refers to the total demand for products and services at a certain price level in the entire society.

Total demand

Aggregate demand: "

It includes two parts: one is domestic demand, including

Measure

(A) Consumer income. Generally speaking, the other conditions remain unchanged, the higher the consumer's income, the more demand for goods. However, as people's income levels continue to increase, the structure of consumer demand will change. That is, as income increases, the demand for some goods will increase, and the demand for some goods will decrease. In economics, articles that change in the quantity of demand and consumer income in the same direction are called normal goods, and articles that change in the quantity of demand and consumer income in the opposite direction are called poor products.

(B) Consumer's

The understanding of the aggregate demand curve depends on whether changes in demand are seen as changes in income or prices.

Keynes cross diagram

In the "Keynesian Crossover Chart", the "Planned Total Expenditure" (or "Total Expenditure", "Total Demand") curve (blue line in the figure) is drawn as a sloped upper right line because consumers will have higher disposable income when There is always greater demand. Disposable income is positively related to total national output. This is because consumers' disposable income is directly proportional to consumption in the consumption function. Aggregate demand will also increase due to increased investment (due to the multiplier effect), although the increase will decrease as imports and taxes increase with income. In this figure, when total demand AD is equal to total domestic output Y (it corresponds to total domestic income). Here, aggregate demand is equal to aggregate supply.

In this figure, the equilibrium level of output and demand is determined by the intersection of the planned expenditure curve with a 45-degree diagonal line representing the equilibrium level of total income and output ( AD = Y ). An equilibrium yield Y is obtained at its intersection.

The movement towards equilibrium usually occurs through changes in inventory, which in turn trigger changes in production and income. If the current output exceeds equilibrium, the inventory will accumulate, encouraging businessmen to reduce production and forcing the economy to return to equilibrium. Similarly, if output levels are below equilibrium, inventory is reduced to meet demand, and firms are encouraged to increase production, so income moves to equilibrium income. This process of pushing to equilibrium occurs when the equilibrium is stable, in other words, when the AD curve is flatter than the AD = Y curve.

In this model, the equilibrium output level determines the equilibrium employment level. (This is linked by Okun's Law.) The model itself does not provide a reason why a balanced employment level should be linked to full employment. Although other levels of consideration will imply this relationship.

If the component of any aggregate demand ( C + I _p + G + NX ) rises under their respective income levels, for example, because the company is more optimistic about the business prospects, the entire AD curve will move upwards. This has led to an increase in equilibrium income and output. Similarly, if there are factors falling, the AD curve will move down and push down the equilibrium income and output (by definition, the AD = Y curve will not change in any way.)

Keynes cross diagram

Aggregate Demand-Aggregate Supply Model

Sometimes, especially in textbooks, the entire "aggregate demand" is linked to a demand curve in a supply-demand graph that looks like Marshall.

In this way, we can associate the "total demand" ( Y = C + I _p + G + NX, whether in real or nominal terms) with any known total average price level P (such as the average price index).

On the AD curve of this graph, typically Y (disposable income) is inversely related to P (total average price level). In theory, the main reason for this is that if the nominal money supply ( M ) is constant, a decline in P means an increase in the real money supply ( M / P ), encouraging lower interest rates and increased spending. This is often called the Keynes effect.

Be careful when applying the theory of supply and demand. The difference is that the scope of aggregate supply determines whether an increase in aggregate demand will lead to an increase in real output or a pure rise in prices. In the figure, an increase in any AD component at any known P will shift the AD curve to the right. This also increases the real output Y and the price level P.

Different levels of economic activity mean that changes in aggregate demand will trigger different combinations of output and price increases. As shown in the figure, at a very low level of real total output, due to the large amount of idle resources, most Keynesian scholars believe that the main changes caused by changes in aggregate demand are output and employment. As the economy approaches full employment income ( Y * ), we will find that more and more price rises when aggregate demand rises will replace the rise in real output.

Beyond Y * , that will become even more extreme, and changes in aggregate demand will be fully translated into price changes. To make matters worse, output levels above Y * cannot be sustained for long. The AS curve here only reflects a short-term relationship. If the economy is still operating on potential output, the AS curve will shift to the left, so that the increase in the original real output disappears.

At low levels of Y , the world will be more complicated. First, most modern economists rarely experience falling prices. So AS is unlikely to move down or right. Second, when they suffer from falling prices (as in Japan), this will cause disastrous deflation.