- "Aggregate demand can be broken down into three main components: personal consumption (C), private investment (I), and government expenditures (G). The relationship can be summed up with this formula: AD = C + I + G."
Aggregate Demand Curve
Aggregate demand is represented by the Aggregate demand curve. The aggregate demand curve looks similar to a regular demand curve, however the Y-axis represents price level, and the X-axis represents real output.
The aggregate demand curves downwards. There are various reasons for this, including:
- The lower the price level, the richer individuals perceive themselves to be and the more they consume.
- When price levels are low, the reserve bank tends to decrease interest rates, resulting in higher consumption.
- A lower price level improves the international competitiveness of a country, resulting in higher net exports.