Aggregate Demand

Aggregate demand refers to the totality of a group of consumers

demand but in macroeconomics, it is the total amount of expenditure on
domestic goods and services. In the circular flow of national income model,
aggregate demand is made up of consumption expenditure, investment
expenditure, government expenditure and net exports.
Some components of aggregate demand are relatively stable and
change only over time like consumption expenditure while other are much
more volatile and change rapidly, causing fluctuations in the level of
economic activity (investment expenditure).
Aggregate demand interacts with aggregate supply to determine the
equilibrium level of national income. Government seeks to regaulate the level
of aggregate demand in order to maintain full employment, avoid inflation,
promote economic growth and secure balance-of-payments equilibrium
through the use of fiscal and monetary policy.
We can maintain full employment by making sure that the aggregate
demand will not extremely decline. Decrease in aggregate demand will result
in decrease in production and will lead to termination of employees in the
long run. We know that if demand decreases, prices will increase and as the
purchasing power of peso goes down, inflation will occur. If our government
maintained full employment and avoid inflation we will experience economic
growth.
Aggregate demand normally rises as the price level falls because of the
following:
a) Real money blances effect
As the price level falls, the real value of money balances held
increases. This increases the real purchasing power of consumers.
b) Prices and interest rates
Lower price level of commodities encourage the customer to buy
more. If they do not have money on hand, the tendency is they will
borrow money and if the number of individual who borrows money
is more than usual, interest rates might go down.
c) International competitiveness
If the Philippines price level is lower than other countries (for a
given exchange rate), Philippines goods and services will become
more competitive. A rise in exports adds to aggregate demand and
therefore boosts national output.