What Is The Foundation Of Aggregate Demand?

Aggregate demand is the total or aggregate quantity of output that is willingly bought at a given level of prices, other things held constant. Aggregate demand is the desired spending in all product sectors: consumption, private domestic investment, government purchases of goods and services, and net exports. It has four components:

1. Consumption is primarily determined by disposable income, which is personal income less taxes. Other factors affecting consumption are long-term trends in income, household wealth, and the aggregate price level.     
2. Investment spending includes private purchases of structures and equipment and accumulation inventories.
3. A third component of aggregate demand is government purchases of goods and services: purchases of goods like tanks or road building equipment as well as the services of judge and public school teachers.

4. A final component of aggregate demand is net exports, which equal the value of exports minus the value of imports. Imports are determined by domestic income and output, by the ratio of domestic to foreign prices, and by the foreign exchange rate of the dollar. Exports are the mirror image of imports, determined by foreign incomes and outputs, by relative prices, and by foreign exchange rates.