Aggregate demand is an important determinant for economic growth.

When aggregate demand increases, the quantity of output demanded for a given price level rises. Therefore, an increase in aggregate demand represents economic expansion. There are many actions that will cause the aggregate demand increase. When the aggregate demand curve shifts to the right, the total quantity of goods and services demanded at any given price level increases. This can be thought of as the economy expanding. To understand what causes the economy to expand, let's start with the basic equation for aggregate demand. We all know that the price level is not directly in the equation for aggregate demand. Rather, it is implicit in each of the terms in the equation. We know that aggregate demand is comprised of Consumption + Investment + Government spending + Net Exports (Exports-Imports). Thus, an increase in any one of these terms will lead to a shift in the aggregate demand curve to the right, and therefore economic growth. The first term that will lead to a shift in the aggregate demand curve is Consumption. This term states that consumption is a function of disposable income. If disposable income increases, consumption will also increase. There are many ways that consumption can increase. A decrease in taxes would have this effect. Similarly, an increase in income would also have this effect. Also, an increase in the marginal propensity to consume or a decrease in the rate of interest would also increase consumption. As well as this, expectations of future economic conditions is an important determinant. Households want to buy at the lowest price possible. If they expect that the price level will rise, then they are inclined to buy more today, causing consumption expenditures and aggregate demand to increase; leading to economic growth. Consumer Expenditure accounts for about 66% of AD and therefore is a very important component of AD. The second term that will lead to a shift in the aggregate demand curve is Investment. This term states that investment is a function of the interest rate. If the interest rate decreases, investment will rise as the cost of investment falls. But what causes interest rates to fall? The government/central bank will decrease interest rates when inflation drops too low, as it is indicative of an economy that may be stagnating or in the beginning stages of a downturn, so interest rates would decrease to try and encourage consumption. Expectations of future economic conditions is also an important determinant working through investment expenditures. If the business sector sees an improving economy on the horizon, with expectations of greater sales and profits, they are more inclined to expand investment now, in spite of current conditions. This, of course, boosts aggregate demand, and leads to economic growth. Technology is another determinant affecting aggregate demand through investment. Technological advances enhance the need to invest in capital, and leads to an increase investment and aggregate demand.

The term variable that will lead to a shift in the aggregate demand curve is government spending. The only way that government spending is changed is through fiscal policy, and government spending tends to change regularly. When government spending increases, regardless of tax policy, aggregate demand increases, leading to economic growth. The fourth term that will lead to a shift in the aggregate demand curve is Net Exports (Exports Imports). Net exports are hugely affected by the real exchange rate. As the real exchange rate falls, the pound becomes weaker, causing imports to fall and exports to rise. Thus, policies that lower the real exchange rate through the interest rate will cause net exports to rise and the aggregate demand curve to shift right and lead to economic growth. As well as this, the strength of a foreign countrys economy could affect net exports, as if trading partners are economically strong, they might export more causing net exports to increase.