Question
Asked Nov 6, 2019
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A) List and explain in detail, the components of Aggregate Demand and explain each of their determinants. List the four components and explain them and under each list and explain the determinants of each.

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Expert Answer

Step 1

The aggregate demand is the summation of all the demands for the goods and services in the economy. The demand for goods and services can come from mainly four sources which are the main four components of the Aggregate demand. The main components of the aggregate demand are the household consumption expenditure (C), Private Investment expenditure (I), Government expenditure (G) and the Net exports (X-M)

Step 2

Household consumption expenditure (C) is the demand for the goods and services from the household sector. The household sector would have the demand for goods and services such as the furniture, household items, food items as well as the beverages in the economy. The summation of all the household consumption expenditures is known as the consumption expenditure from household sector denoted by ‘C’. The main components that determine the household consumption expenditure are the level of disposable income of the household, wealth of the household and the interest rate in the economy.

When there is higher interest rate in the economy, people would decide not to spend and decide to save more in order to earn more interest. Thus, the rate of interest determines the level of household consumption in the economy. Similarly, when there is higher level of disposable income to the consumers, they would consume more and vice versa. The same is with the wealth of the household. When the wealth is higher, the consumption will be higher and vice versa.

Step 3

Private investment expenditure (I) is the expenditure made by the businesses in the economy. Thus, it is the demand for goods and services from the business sector in the economy. The investment expenditure is considered to be the most volatile component of the aggregate demand. The main components that determine the Investment expenditure are the interest rate and the business confidence.

There is an inverse relation between the rate of interest and the level if in...

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