What Is the Most Important Component of Aggregate Demand? Essay

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Aggregate Demand is the total of all demands or expenditures in the economy at any given price. It is made up of four components, which are Consumer Expenditure (C), Investment (I), Government Spending (G) and Net Exports (X-M). In my opinion, consumer spending (C) is the most important factor of aggregate demand. This is because I find that the five factors influence the aggregate demand greatly as individual points, so joining these together under one component, indicates that consumer spending is a large component of AD. Firstly, real disposable income is the main influence of consumer expenditure. Richer households tend to spend more than poorer ones. This is important because the amount of real disposable income will dramatically effect the AD as if the amount is low then barely any money will be spent. Secondly, wealth is another factor. The richer people are the higher their APC. This is because if they have savings and investments, they don’t have to be as careful of unplanned costs. Next, if the consumer’s confidence is high, such as being optimistic about the future then the consumer is less likely to save for a rainy day and is likely to spend and consume more. Also, if interest rates are low then the consumer is less likely to save and thus spend more. Finally, age structure of the population drives consumption. This is because young and elderly populations have a tendency to have a higher APC than the middle-aged population. Consumer expenditure is more important to AD; than investment because investment is a highly volatile component; than government spending because government spending is dependent on consumers as well as other political factors; and last in comparison to net exports, because net exportation is largely dependent other

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