Explain Aggregate Demand and its components.

Aggregate demand is the total amount of demand for the finished goods and services produced in the economy at a specific price level.

The components of aggregate demand are :

a. Private or household consumption demand: The total expenditure incurred by all the households of an economy on their personal consumption is called private consumption expenditure. It depends upon the disposable income and the marginal propensity to consume.

b. Private investment demand: It refers to the demand for capital goods by private investors. It is an addition to the existing stock of capital assets as machines and factory buildings. It depends upon the marginal efficiency of capital and interest rate. It can be either an autonomous investment or an induced investment.

c. Government demand for goods and services: How should the government services on account of the needs of the public for roads, schools, hospitals, maintenance of law and defense, etc.

d. Demand for net export: Net export is the Foreign demand for goods and services produced in an economy. When the export exceeds imports, the net exports are positive. When the import exceeds Exports, the net exports are negative. These are influenced by many factors as exchange rate, price and the quality of goods.