what are the four sources of aggregate demand
Aggregate demand
John Maynard Keynes in The General Theory of Employment , Interest and Money argued during the Great Depression that the loss of output by the private sector as a result of a systemic shock ( the Wall Street Crash of 1929 ) ought to be filled by government spending . First , he argued that with a lower ' effective aggregate demand ' , or the total amount of spending in the economy ( lowered in the Crash ) , the private sector could subsist on a permanently reduced level of activity and involuntary unemployment , unless there were active intervention . Business lost access to capital , so it had dismissed workers . This meant workers had less to spend as consumers , consumers bought less from business , which because of additionally reduced demand , had found the need to dismiss workers . The downward spiral could only be halted and rectified by external action . Second , people with higher incomes have a lower marginal propensity to consume their incomes . People with lower incomes are inclined to spend their earnings immediately to buy housing , food , transport and so forth , while people with much higher incomes can not consume everything . They save instead , which means that the velocity of money , meaning the circulation of income through different hands in the economy , is decreased . This lowered the rate of growth . Spending should therefore target public works programmes on a large enough scale to speed up growth to its previous levels .
John Maynard Keynes in The General Theory of Employment , Interest and Money argued during the Great Depression that the loss of output by the private sector as a result of a systemic shock ( the Wall Street Crash of 1929 ) ought to be filled by government spending . First , he argued that with a lower ' effective aggregate demand ' , or the total amount of spending in the economy ( lowered in the Crash ) , the private sector could subsist on a permanently reduced level of activity and involuntary unemployment , unless there were active intervention . Business lost access to capital , so it had dismissed workers . This meant workers had less to spend as consumers , consumers bought less from business , which because of additionally reduced demand , had found the need to dismiss workers . The downward spiral could only be halted and rectified by external action . Second , people with higher incomes have a lower marginal propensity to consume their incomes . People with lower incomes are inclined to spend their earnings immediately to buy housing , food , transport and so forth , while people with much higher incomes can not consume everything . They save instead , which means that the velocity of money , meaning the circulation of income through different hands in the economy , is decreased . This lowered the rate of growth . Spending should therefore target public works programmes on a large enough scale to speed up growth to its previous levels .