Macroeconomics is a branch of dealing with the performance structure, and decision-making of the entire . The four key issues that macroeconomic addresses are economic growth, unemployment, inflation and the balance of payments and they are all relate one way or another to the total level of spending in the economy. This essay will describe the meaning by the term aggregate demand and analyze the short-term relationship between aggregate demand with those four issues as well as the relationships between the four issues with the business cycle.
The term “aggregate demand” can be described as the total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide and the curve is often downward sloping because at lower price levels a greater quantity is demanded. The formula for Aggregate Demand is important in that is allows to look at Aggregate Demand in detail: AD = C + I + G + (X-M) where AD is the Aggregate Demand; C is the level of consumption by consumers; I is the investment that occurs in the economy, done mainly by firms; G is the level of Government investment; X is the level of exports and M is the level of imports in the economy. It can be seen from the formula that C, I, G and X are positive while the component M is negative. This is because the consumption level has positive effect since when consumers spend on goods or services it will raises the money flow in the economy. Investment also has positive effect because the more a company invests the more available money there is for the company which is invested and therefore that company will have more demand and spend more on goods or services. Similarly, government expenditure and exports have positive effects to the money flow in the economy. Import, however has negative impact since money will flow abroad and aggregate demand only refers to spending on domestic firms. In other words, a rise in C, I, G and X, while a fall in M would all raise the level of aggregate demand.
There are four macroeconomic issues’ objectives that governments attempt to achieve. They try to achieve high rates of economic growth over the long term and stable growth, avoiding both recessions and excessive in short-term. They also try to reduce unemployment and keep inflation both low and stable. Another major macroeconomic aim of governments is a satisfactory balance of payments and stable exchange rates. There are relationships between the four objectives and aggregate demand which are necessary to be understood because an increase or decrease in aggregate demand may lead to the changes in the economic growth, unemployment, inflation or the balance of payments.