Question

What are the components of the aggregate demand (AD) curve?

Short answer

There are four components of the AD curve.

Step-by-step solution

Step 1. Definition

Aggregate demand is the demand for all the finished goods and services in the economy.

There are four components of the AD (aggregate demand) curve i.e., consumption, investment, government spending, and net exports.

Step 2. Explanation

1. consumption: consumption comprises all the expenditure in total on the consumption of goods and services which may be durable, semi-durable, or non-durable.

2. investment: investment is the expenditure incurred by the purchase of machines, plants, equipment, etc., to increase our production capacity.

3. government expenditure: it is also an expenditure experienced on the procurement of consumer goods and capital goods to satisfy the combined wants of the economy like parks, hospitals, and roads.

4. net exports: net exports are the difference of imports and exports. It shows the net demand for a local product in the rest of the world.