In macroeconomics, aggregate demand (AD) is the total demand for final goods

and services in an economy at a given time. [1] It specifies the amounts of goods and
services that will be purchased at all possible price levels. [2] This is the demand for
the gross domestic product of a country. It is often called effective demand, though
at other times this term is distinguished.

An aggregate demand curve is the sum of individual demand curves for different sectors of the
economy. The aggregate demand is usually described as a linear sum of four separable demand
sources:[4]

where

is consumption (may also be known as consumer spending)

where

is consumers' income and

is Investment,

is Government spending,

is taxes paid by consumers,

is Net export,
o

is total exports, and

is total imports

These four major parts, which can be stated in either 'nominal' or 'real' terms, are:

personal consumption expenditures (C) or "consumption," demand by households and

unattached individuals; its determination is described by the consumption function. The
consumption function

gross private domestic investment (I), such as spending by business firms on factory
construction. This includes all private sector spending aimed at the production of some
future consumable.
o In Keynesian economics, not all of gross private domestic investment counts as
part of aggregate demand. Much or most of the investment in inventories can be
due to a short-fall in demand (unplanned inventory accumulation or "general
over-production"). The Keynesian model forecasts a decrease in national output
and income when there is unplanned investment. (Inventory accumulation would
correspond to an excess supply of products; in the National Income and Product
Accounts, it is treated as a purchase by its producer.) Thus, only the planned or

intended or desired part of investment (Ip) is counted as part of aggregate demand.

(So, I does not include the 'investment' in running up or depleting inventory
levels.)
o Investment is affected by the output and the interest rate (i). Consequently, we can
write it as I(Y,i). Investment has positive relationship with the output and negative
relationship with the interest rate. For example, an increase in the interest rate will
cause aggregate demand to decline. Interest costs are part of the cost of borrowing
and as they rise, both firms and households will cut back on spending. This shifts
the aggregate demand curve to the left. This lowers equilibrium GDP below
potential GDP. As production falls for many firms, they begin to lay off workers,
and unemployment rises. The declining demand also lowers the price level. The
economy is in recession.

gross government investment and consumption expenditures (G).

net exports (NX and sometimes (X-M)), i.e., net demand by the rest of the world for the
country's output.

In sum, for a single country at a given time, aggregate demand (D or AD) = C + Ip + G + (X-M).
These macroeconomic variables are constructed from varying types of microeconomic variables
from the price of each, so these variables are denominated in (real or nominal) currency terms.

DEFINITION of 'Aggregate Supply'

The total supply of goods and services produced within an economy at a given overall price level
in a given time period. It is represented by the aggregate-supply curve, which describes the
relationship between price levels and the quantity of output that firms are willing to provide.
Normally, there is a positive relationship between aggregate supply and the price level. Rising
prices are usually signals for businesses to expand production to meet a higher level of aggregate
demand.
Also known as "total output".

'Aggregate Supply'
A shift in aggregate supply can be attributed to a number of variables. These include changes in
the size and quality of labor, technological innovations, increase in wages, increase in production
costs, changes in producer taxes and subsidies, and changes in inflation. In the short run,
aggregate supply responds to higher demand (and prices) by bringing more inputs into the
production process and increasing utilization of current inputs. In the long run, however,
aggregate supply is not affected by the price level and is driven only by improvements in
productivity and efficiency.