Editing Aggregate demand (section)

==Components==
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:<ref>{{cite web | url =http://www.tutor2u.net/economics/content/topics/ad_as/ad-as_notes.htm | title = aggregate demand (AD) | access-date = 2007-11-04| archive-url= https://web.archive.org/web/20071109072803/http://www.tutor2u.net/economics/content/topics/ad_as/ad-as_notes.htm| archive-date= 9 November 2007 | url-status= live}}</ref>
: <math>AD = C + I + G + (X - M)</math>
where
* <math>C</math> is consumption (may also be known as consumer spending), which is given by <math>C_0 + c(Y - T)</math> where <math>Y</math> is consumers' income and <math>T</math> the taxes paid by consumers,
* <math>I</math> is investment,
* <math>G</math> is government spending,
* <math>NX = X - M</math> is net exports, where
** <math>X</math> is total exports, and
** <math>M</math> total imports, given by <math>M_0 + m(Y - T)</math>.

These four major parts, which can be stated in either [[Real vs. nominal in economics|'nominal' or 'real']] terms, are: 
* personal consumption expenditures (<math>C</math>) or "consumption", demand by households and unattached individuals; its determination is described by the [[consumption function]]. A basic conception is that it is the total consumption expenditures of the domestic economy. The consumption function is <math>C = C_0 + c \times (Y - T)</math>, where
** <math>C_0</math> is [[autonomous consumption]], <math>c</math> the [[marginal propensity to consume]], and <math>(Y - T)</math> the disposable income.
* [[Gross (economics)|gross]] private domestic [[investment (macroeconomics)|investment]] (<math>I</math>), such as spending by business firms on [[factory]] construction. This is conceived as all [[private sector]] spending aimed at the production of some future [[consumable]].
** 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 (<math>I_p</math>) is counted as part of aggregate demand. (So, <math>I</math> does not include the 'investment' in running up or depleting inventory levels.)
** Investment is affected by the output and the [[interest rate]] (<math>i</math>). Consequently, we can write it as, <math>I(Y, i)</math>, a function ''I'' which takes total income and interest rate as parameters. Investment has positive relationship with the output and negative relationship with the interest rate. Thus, 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.
* gross [[government]] investment and consumption expenditures (<math>G</math>), also determined as <math>G-T</math>, the difference of government expenditures and taxes. An increase in government expenditures or decrease in taxes, therefore leads to an increase in GDP as government expenditures are a component of aggregate demand.
* [[Net worth|net]] [[exports]] (<math>NX</math> and sometimes (<math>X - M</math>)), net demand by the rest of the world for the country's output. This contributes to the [[Current account (balance of payments)|current account]].

In sum, for a single country at a given time, aggregate demand (<math>D</math> or <math>AD</math>) is given by <math>C + I_p + G + (X - M)</math>.

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.