Aggregate demand.
In plain English
Aggregate demand adds up four sources of spending: consumption, business investment, government purchases, and net exports, which is exports minus imports. Drawn as a curve, it slopes down, because as the overall price level falls the same money buys more and total quantity demanded rises. Interest rates, taxes, confidence, and foreign income shift the whole curve rather than move along it. Where aggregate demand meets aggregate supply sets both output and the price level in the standard model. Policy tools work mainly by pushing this curve one way or the other.
01Why it matters
Recessions and inflation both trace back to this total, because when spending falls short of what the economy can produce layoffs follow, and when it runs past capacity prices climb.
02The math, step by step
In a small economy, households spend $700 billion, businesses invest $180 billion, government buys $250 billion, exports are $120 billion and imports $150 billion. Aggregate demand is 700 plus 180 plus 250 plus (120 minus 150), or $1,100 billion.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Ordinary demand curves track one good against its own price. Aggregate demand tracks all spending in the economy against the overall price level. Substituting between two products does not change aggregate demand at all, because the money still gets spent.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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