C =consumption
I=investment
G=government spending
(X – M)=net exports
The next part of this question shall examine the changes of the components of AD, particularly investment.
As I mentioned earlier, investment can be mentioned as the addition of capital stock to the economy. There are 4 factors that cause a change in investment: interest rates, change in the level of national income, technological change and business confidence. This article talks about how taxes have affected growth and how businesses are reluctant to invest. This text refers to two main concepts of investment; they are changes in the level of national income and business confidence.
It has been clearly stated that household wages and salaries climbed by 0.8% in the third quarter…..disposable incomes rose by only 0.2%. As national income rises, consumption rises. In this case, every business needs to invest to meet the demand of consumers. In short, national income is directly proportional to investment. However, here the disposable income has only rose by 0.2%. This certainly means that consumption wouldn’t grow heavily, but only by a bit. Businesses would doubt their chances in growth if they invested back. As suggested, business profits were low and companies opted to increase dividends than increase. This is a witty decision. The economic climate within the country doesn’t seem of the right sort to invest. There isn’t any point in investing when there is a high possibility of a fall in aggregate demand. Therefore, there would be no growth in potential output.
On the whole, a change in any of the components of aggregate demand causes a shift in the aggregate demand curve. An increase in the components causes an increase in the aggregate demand, causing a shift to the right on the AD curve. On the other hand, a decrease in the components of aggregate demand results in a fall in the aggregate demand, moving the AD curve to the left. Investment has slightly changed in this text: business investment rose by a tiny 0.3%. This leads to a slight increase in aggregate demand, see below!
This is a rough representation of how a change in investment would result in a shift of the AD curve. In this case, AD1 represents the current demand (no figure) and AD2 represents a shift to the right which means there is an increase in the aggregate demand due to an increase in investment by 0.3%(not shown) It is clear that if any of the components of aggregate demand increases by little, then aggregate demand either shifts by a little or not at all. In this case study, aggregate demand has fallen due to other factors (not focused)