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Aggregate Demand

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Aggregate demand is the total demand in an economy for a given length of time. The phrase "aggregate demand" can be also be understood as "aggregate expenditure," as it is always expressed in terms of expenditure on services and products. The aggregate demand for any economy is expressed in the function:

Y = C + I + G + (X-M)

in which:

Y = aggregate demand
C = consumer expenditures
I = business expenditures
G = government expenditures
X = total value of all exports
M = total value of all imports

Therefore, aggregate demand is the total expenditures in an economy plus net imports.

This formula for determining aggregate demand is credited to John Maynard Keynes, commonly considered to be the founding theorist of modern macroeconomics. Governments often cite aggregate demand when determining fiscal policy or adjusting the money supply. Business cycles, inflation and other economic phenomena are all affected by aggregate demand, and vice-versa.



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