Theories of Aggregate Demand

Theories of aggregate demand explain how the total spending on goods and services in an economy varies based on different factors. Key influences include consumer spending, business investments, government expenditure, and net exports (exports minus imports). For example, when consumers feel confident, they tend to spend more, increasing demand. Conversely, higher taxes or interest rates can reduce spending. These theories help understand economic growth or downturns by analyzing how changes in these components impact overall demand, guiding policymakers in making decisions to stabilize or boost the economy.