Aggregate demand refers to the totality of a group of consumers
demand but in macroeconomics, it is the total amount of expenditure on domestic goods and services. In the circular flow of national income model, aggregate demand is made up of consumption expenditure, investment expenditure, government expenditure and net exports. Some components of aggregate demand are relatively stable and change only over time like consumption expenditure while other are much more volatile and change rapidly, causing fluctuations in the level of economic activity (investment expenditure). Aggregate demand interacts with aggregate supply to determine the equilibrium level of national income. Government seeks to regaulate the level of aggregate demand in order to maintain full employment, avoid inflation, promote economic growth and secure balance-of-payments equilibrium through the use of fiscal and monetary policy. We can maintain full employment by making sure that the aggregate demand will not extremely decline. Decrease in aggregate demand will result in decrease in production and will lead to termination of employees in the long run. We know that if demand decreases, prices will increase and as the purchasing power of peso goes down, inflation will occur. If our government maintained full employment and avoid inflation we will experience economic growth. Aggregate demand normally rises as the price level falls because of the following: a) Real money blances effect As the price level falls, the real value of money balances held increases. This increases the real purchasing power of consumers. b) Prices and interest rates Lower price level of commodities encourage the customer to buy more. If they do not have money on hand, the tendency is they will borrow money and if the number of individual who borrows money is more than usual, interest rates might go down. c) International competitiveness If the Philippines price level is lower than other countries (for a given exchange rate), Philippines goods and services will become more competitive. A rise in exports adds to aggregate demand and therefore boosts national output.