What part of aggregate demand would you say is the most volatile component and relate this to the economy today.

1 Answer | Add Yours

sciencesolve's profile pic

sciencesolve | Teacher | (Level 3) Educator Emeritus

Posted on

There are four aggregate demand determinants that are grouped by the expenditure categories, such that: investment expenditures, consumption expenditures, net expenditures, government spending. Among these determinants, investment expenditure component seems to be the most erratic.

Investment expenditures are grouped in 5 categories as it follows: interest rates, expectations, physical wealth, technologies, capital prices.

The higher the interest rates are, the fewer investments are made and the aggregate demand decreases.

The capital price is also a determinant factor in investment expenditure because the more increased the price of capital is, the more decreased the investment expenditures and aggregate demand are.

New technologies are also a determinant factor that influences the investment expenditures, increasing them.

The boost of aggregate demand also occurs when the business sector identifies a future economical improvement and decides to increase the investments.

As a conclusion, the cyclical behavior of aggregate demand is given by the increased unpredictable conduct of investment expenditure component.

Sources:

We’ve answered 318,911 questions. We can answer yours, too.

Ask a question