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Questions
State the determinants of aggregate demand.
Explain the determinants of aggregate demand.
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Solution
The following are the determinants of aggregate demand:
- Consumption expenditure (C): Consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants.
- Investment expenditure (I): Private investment expenditure refers to the planned (ex-ante) total expenditure incurred by all the private investors on the creation of capital goods such as expenditure incurred on new machinery, tools, buildings, raw materials etc.
- Government expenditure (G): Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment purposes to enhance the welfare of the society and to achieve higher economic growth rates.
- Net exports (X – M): Net exports of a country refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of that country.
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