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Which of these four components of aggregate demand declined the most during the 2007 to...

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martairobert | (Level 1) Salutatorian

Posted February 6, 2013 at 2:35 AM via web

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Which of these four components of aggregate demand declined the most during the 2007 to 2009 recession? 

Select National Income and Product Accounts. From Table 1.1.6 and 1.1.7 examine all four components of GDP (C, I, G, and Xn). 

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted February 6, 2013 at 3:08 AM (Answer #1)

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Without knowing what tables you are referring to, it is not really possible to use the tables in this answer.  However, the component of aggregate demand (AD) that fell the most during the recession was investment expenditure.  As the spreadsheet in this link shows, private investment fell much farther than any of the other components of AD.

The four components of AD (and of gross domestic product) are government spending, consumer spending, private investment, and net exports.  Private investment does not refer to putting money in stocks and bonds.  Instead, it refers to things like the construction of homes and the purchase of machinery by companies.  Of the four components, private investment fell the farthest.

This makes sense given the way our economy works today.  When things started to go badly, the government started spending.  Part of the spending was through automatic stabilizers such as unemployment insurance and some was through things like President Obama’s stimulus package.  Therefore, government spending actually rose for a while and then fell only slightly.  This meant that more money was going into consumers’ pockets and their spending stayed fairly stable.  However, businesses were extremely reluctant to invest.  This was partly because banks were reluctant to loan and partly because businesses were not confident that the economy would recover and allow them to realize a profit on their investments.

For these reasons, investment was the component of AD that feel most in the recession.

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