What is Aggregate Demand

• Aggregate means total - demand means the willingness and ability to buy a product. So aggregate demand means the total of willingness and ability to buy a product.

• AGGREGATE DEMAND is total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels.

•   There are 3 factors that effect the aggregate demand (slope move downward):  

 1. Wealth Effect : lower price level means people have more money or become 'wealthier'. when  people become wealthier they will spend more. Spending is increasing, Therefore aggregate demand is also increasing. 

(lower price level - wealthier - more spending) 

2. Interest Rate Effect : when the price level is lower, people can save more money. They put their money on the bank to save it. Due to more people put the money, the bank has more money supply. In order to circulate it, Bank will loan more and they will decrease the interest rate to attract the investors. More investors loan from bank and do investments. So investment increase and investment is one of GDP indicators, Therefore Aggregate demand is increasing.

(lower price level - save money on the bank - bank have more money supply - lowering the interest rate - more investors - investment increase - GDP increase - AG increase)

3. Exchange Rate Effect : lower interest rate resulted to an increasing of investment. Investors are more attact to invest in another country which have higher interest rate in return because they want to get higher profit on their investment. Our currency is flowing to that country because in order to invest they have to exchange their currency (usually US Dollars $). So our country have lower currency. which make our domestic products are cheaper compared to the other country. Foreigners will import our products. so exports is increasing. Export is one of GDP components, so our GDP is increasing and so our Aggregate Demand

(low interest rate - more invesment- investors invest on other countries - our currency is lower - cheaper domestic products- more export - increase in GDP and AD)