Aggregate Demand

1. AGGREGATE DEMAND
Presented By:-Kuldeep M R
Guided By:- Mervin Felix Caleb

2. Aggregate Demand
• Aggregate demand is an economic measurement of the total amount
of demand for all finished goods and services produced in an
economy
• Aggregate demand is expressed as the total amount of money
exchanged for those goods and services at a specific price level and
point in time
• Aggregate demand consists of all consumer goods, capital goods
(factories and equipment), exports, imports, and government
spending.
• Aggregate Demand was Introduced by the Economist “John
Maynard Keynes”

3. History
John Maynard Keynes
• John Maynard Keynes, was an English
economist, whose ideas fundamentally
changed the theory and practice of
macroeconomics and the economic
policies of governments.
• Keynes advocated the use
of fiscal and monetary policies to
mitigate the adverse effects of
economic recessions and depressions.
He detailed these ideas in The General
Theory of Employment, Interest and
Money, published in 1936.

4. Contd..
Keynesian Economics
• Keynesian economics is a macroeconomic economic theory of
total spending in the economy and its effects on output,
employment, and inflation.
• Keynes advocated for increased government expenditures and
lower taxes to stimulate demand and pull the global economy
out of the depression.
• Keynesian economics focuses on using active government
policy to manage aggregate demand in order to address or
prevent economic recessions.

5. Contd..
The Great Depression
• The Great Depression was the greatest and longest economic
recession in modern world history.
• The Great Depression started in the United States after a major
fall in stock prices that began around September 4, 1929, and
became worldwide news with the stock market crash of
October 29, 1929, (known as Black Tuesday).
• The causes for great depression was Bank Failure, Decline of
International trade, Less demand for Agriculture Produce and
industrial goods, Unequal Distribution of wealth.

6. Contd..
• The Great Depression had devastating effects in both rich and
poor countries. Personal income, tax revenue, profits and
prices dropped, while international trade fell by more than
50%. Unemployment in the U.S. rose to 23% and in some
countries rose as high as 33%.
• Cities around the world were hit hard, especially those
dependent on heavy industry.
• Construction was virtually halted in many countries.
• Farming communities and rural areas suffered as crop prices
fell by about 60%.
• Facing decline in demand with few alternative sources of jobs,
areas dependent on primary sector industries suffered the most.

7. Calculating Aggregate Demand
Aggregate Demand= C+I+G+(X-M)
where:
C=Consumer spending on goods and services
I=Private investment and corporate spending on non-
final capital goods (factories, equipment, etc.)
G=Government spending on public goods and social
services (infrastructure, Medicare, etc.)
(X-M):- Exports minus Imports
- The net trade balance
- Trade Surplus (X>M)
- Trade Deficit (X<M)

8. Factors That Can Affect Aggregate
Demand
• Changes in Interest Rates
• Income and Wealth
• Changes in Inflation Expectations
• Currency Exchange Rate Changes

9. Aggregate Demand Curve

10. Why AD Curve Slopes Downwards
Falling real
Incomes
• As the price level rises, the real value of income falls and
consumers are less able to buy what they want or need, this is
known as the real balance effect
Balance of
Trade
• A persistent rise in the price level of Country X could make
foreign-produced goods and Services cheaper, causing a fall in
exports and rise in imports
Interest
rate effect
• If the price level rises, this causes inflation and increase in demand
for money and a possible rise in interest rate on loans which then
has a deflationary effect on consumer and business demand

11. Shifts in Aggregate Demand
• Outward Shift

12. Contd…
• Inward Shift

13. Causes of Shifts in Aggregate Demand
Fall in AD
Fall in Exports
Cut in Government
Spending
Higher Interest Rates
Decline in household wealth
Increase in AD
Depreciation of the
Exchange rate
Cuts in Direct and Indirect
Taxes
Increase in Household
wealth
Expansion of supply of
Credit + Lower Intrest Rates

14. Consumption
• Consumption is defined as spending on acquisition of Goods
and Services.
• Types of Consumption
– Private Consumption
• Private consumption is defined as the value of the
Consumption Goods and Services acquired and consumed
by households.
– Government Consumption
• Government Consumption government expenditure on
goods and services that are used for the direct satisfaction
of individual needs or collective needs of members of the
community.

15. Aggregate Demand and Government
of India
• Weakening aggregate demand emerged as a major constraint to
growth in 2008-09, due to decrease in private consumption.
• During this time the Government and RBI realized that, In
long run the policies should be framed in such a way that it
increased consumption, which in turn increase in Aggregate
demand.
• The Covid-19, the Government revenues have fallen lead to
less fiscal space to spend leads to less spending and fail to
support demand.
• If the problem of inadequate demand is not addressed, leads to
prolonged downturn in overall economy.
• RBI said that Government Consumption is the fuel for
Economy during this Pandamic.

16. References
• https://www.investopedia.com/terms/a/aggregatedemand.
asp
• https://en.wikipedia.org/wiki/Aggregate_demand
• https://www.slideshare.net/MatthewBentley3/aggregate-
demand-57037812
• https://www.orfonline.org/expert-speak/indias-
unaddressed-demand-
crisis/#:~:text=Aggregate%20Demand%20is%20the%20sum
,government%20expenditure%20and%20net%20exports.&t
ext=Furthermore%2C%20the%20slowdown%20in%20privat
e,of%20India's%20GDP%5Biii%5D.
• https://www.indiabudget.gov.in/budget_archive/es2008-
09/chapt2009/chap13.pdf
• https://www.adb.org/sites/default/files/publication/66011
1/adbi-wp1201.pdf