Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.
<h3>What does aggregate demand represent?</h3>
Aggregate demand is the amount of total spending on domestic goods and services in an economy. The downward-sloping aggregate demand curve shows the relationship between the price level for outputs and the quantity of total spending in the economy.
Aggregate demand is calculated as the sum of consumer spending, investment spending, government spending, and the difference between exports and imports.
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