Theory of Aggregate Demand

Paper Summary:

The paper states that the economics theory of aggregate demand suggests AD is the measurement of the ability and willingness of people and firms to buy goods. The concept has been derived from Say's law which states that supply creates demand. The paper comments that this means that when there is enough supply people are motivated to purchase things for consumption; firms are more inclined to invest in more projects as the supply of goods and services are available at a cheaper price. The paper highlights that world components of aggregate demands such as prices, international relationships and political institutions all create interdependency and therefore it becomes difficult to actually segregate how certain components affect the others. The paper determines the relationship between financial institutions and aggregate demand and to what extent the quantity theory of money is relevant. The paper concludes that financial institutions are indirectly linked to AD. The quantity theory of money in turn is a good model for explaining the way AD operates in financial market.

From the Paper:

"Having said that it, one can now analyze the relationship of financial institutions and AD. Financial institutions deals in resources rather than goods and services and factors like credit level determined by the government, interest rates, and the monetary policies greatly influence its performance. Furthermore, financial institutions operate on a different platform as it does not apply the empirical model of AD theory."

Sample of Sources Used:

• Hubbard, R. 2004, Money, the Financial System, and the Economy. (5th Edition)
• Church, K B, Smith, P N and Wallis, K F 1994, 'Econometric evaluation of consumers' expenditure equations', Oxford Review of Economic Policy, Vol 10(2), pages 71-85.
• Digital Economist, Accessed on 9-6-2004 from: http://www.digitaleconomist.com/
• Schenk, R. 1997-8, Assumptions of the Quantity Theory, Overview: Money Matters, Accessed on 9-6-2004 http://ingrimayne.saintjoe.edu/econ/Money/Assumptions.html

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