Aggregate Demand

What is Aggregate Demand?


*noun*; a concept central to the idea of Keynesian economics. Under this theory, business cycles (recessions, depressions, booms, recoveries) are caused by a failure of total demand across the entire economy to match total output.

Aggregate demand is not merely influenced by people's ability to buy what they produce; it is also influenced by the marginal propensity to consume(MPC). If the MPC is less than 1, then an increase in national income will be matched by a smaller increase in aggregate demand, causing unemployment to rise and prices to fall.

...When we say that the expectation of an increased demand, i.e. a raising of the aggregate demand function, will lead to an increase in aggregate output, we really mean that the firms, which own the capital equipment, will be induced to associate with it a greater aggregate employment of labour

J.M. Keynes, * The General Theory of Employment, Interest, and Money* (1936), Ch.4

See recession, depression, boom, recovery, keynesianism, keynesian


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