Spend Solutions: 5 Factors That Shift Aggregate Demand

| September 20, 2017

Aggregate DemandAggregate demand refers to a form of economic measure for the total sum of all the goods and services that are produced by an economy. It is usually expressed as the sum total of all the money received in exchange of these goods and services.

If you are in business, it is important to understand aggregate demand and the various shifts that it undergoes in order to plan well for the future of your company/business. The aggregate demand can either increase or decrease depending on a number of things. Here are five factors that shift the aggregate spend.

1. Expectations

As a Consumer you have definite expectations when it comes to the economy’s future and you will adjust your spending behavior accordingly. If the future does not look bright for the economy, you will opt to save more as opposed to spending.

When the price levels rise, they lead to the increase of the aggregate demand. If you foresee a situation where the price level will rise in the near future, you will naturally go to the stores and buy such goods in bulk. This will end up increasing the consumption expenditures in the aggregate demand.

2. Income Distribution

Distribution of income is related to your profits and wages directly. When your wages are increased, you will have more money on your hands to spend thanks to the added income.

You will consume more than before the wage increase and therefore cause the consumption expenditure to greatly increase. This increased consumption causes the aggregate demand to shift to the right.

When you have less income or your wages and profits are slashed, you will have less money to spend thereby causing the aggregate demand curve to shift left. The less income could be as a result of the market crashing occasioning you to suffer loss.

3. Fiscal and Monetary Policies

Governments have the ability to impact the aggregate demand. A government can either spend money or increase the prevailing taxes as a way of influencing how consumers save or spend.

If the government increases taxes or reduces its own spending then the aggregate demand shifts to the left due to the contractionary policy. The AD curve will increase to the right when the government increases its spending and lowers its taxes. Fiscal policy relates to government spending and changing taxes whereas monetary policies relate to the manipulation of interest rates.

4. Foreign Income

Foreign income relates to the amount of income your country generates from its numerous trading partners spread across the world. When foreign income in your country increases, you will notice that exports increase causing the aggregate demand to also rise. When the foreign income of your country decreases then automatically the exports decrease and the aggregate demand also decreases.

5. Exchange Rates

When your country’s exchange rates increase, the net exports tend to fall thereby causing the aggregate demand curve to shift to the left. An increased demand for imports in your country will consequently lead to the fall of the demand for export goods causing the AD curve to shift to the left.

A change in your preferences or tastes is an example of an exogenous shift that causes a decrease in the demand for export goods. High exchange rates mean that your country’s currency becomes stronger thereby making your exports more expensive in other countries.

This will cause the goods to have less demand and exports go down.

Final Words

Aggregate demand is useful in as far as it tells you how the income and price level are related. It is useful when you are finding the effects of various changes on economic variables as well as the relationship that exists between the price level and income/output. It helps you as you review and dispute reports on the state of the economy.



Category: Business, Money

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