Question

What are the determinants of Aggregate Demand (AD)?

Answer 1

An assortment of ceteris paribus factors other than the price level that affect aggregate demand, but which are assumed constant when the aggregate demand curve is constructed. Changes in any of the aggregate demand determinants cause the aggregate demand curve to shift.

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Answer 2

Answer:

The average production, employment, government expenditure and the net exports ( ie Exports-Imports) are the aggregate demand.  This indicates the Real GNP and the Price Level relationship. The determinants include -

• Net export effect - When domestic prices rise, the import demand increases because domestic goods become relatively expensive and export demand decreases.
• Financial Balances - Real income declines as the value of money decreases and the inflation increases. The inflationary transition moves aggregate demand to the left as it decreases.
• Effect of the interest rate - A real interest rate is the marginal rate indexed to the rate of inflation. To maintain real interest rates, nominal interest rates rise as inflation increases. Lower real interest rates will lower major product prices as they will increase spending on business capital investments as long-term investment plan costs are reduced.