6 - Aggregate Demand

Abstract

This chapter discusses aggregate demand. Aggregate demand is a measure of the desired total quantity of goods and services that is demanded throughout the economy in some period of time. The aggregate demand curve shows how that total demand for goods and services varies with the price level. Total spending and total income are identical in the sense that income is created by spending. Policies that are designed to raise or lower the national income should do this by raising or lowering total spending. The spending-income relationship is illustrated by the circular-flow diagram. Saving, taxes, and imports are all leakages from the circular flow of spending and income; because they reduce current spending, they reduce total income. Investment spending, government spending, and purchases of exports are all injections into the circular flow in that by increasing total spending, they tend to increase total income. The macroeconomic equilibrium occurs when total leakages equal total injections.