What Causes Decreases in Aggregate Demand?

Malcolm Tatum

"Aggregate demand" is a term used to describe the total amount of demand for products that exists within a defined economic situation, such as the economy of a nation. This type of demand can be influenced by a number of factors, including some that will lead to decreases in aggregate demand and make a significant impact on the overall economy. Some of these factors include shifts in exchange rates, the distribution of income among consumers within the economy, changes in governmental economic policies that impact consumer demand, and even shifts in customer needs and wants.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

One of the more common reasons for decreases in aggregate demand have to do with changes in the distribution of income within the economy. If the wages and salaries of consumers who normally spend a great deal of disposable income on certain products should be adversely impacted by unemployment or reduction in wages due to a recession, then the demand for those products will decrease noticeably. Unless prices are lowered to a point that consumers can afford those products once more, there is a good chance that the demand will remain at a low level until the distribution of income is restored.

Decreases in aggregate demand may also occur when exchange rates between the currencies of different nations shift. Should that shift have an adverse effect on the buying power of consumers, they are likely to reduce their spending, which in turn means the demand for certain goods and services will decrease, lowering the overall or aggregate demand in that nation. This type of phenomenon may be short-lived, since exchange rates tend to shift regularly and those same consumers may soon find their currency is able to purchase more, which will normally trigger an increase in the overall demand.

Changes in governmental laws and regulations regarding trade can also lead to decreases in aggregate demand. When buyers find that those new regulations are prohibitive, essentially making it more expensive to acquire certain products, chances are they will buy less. For this reason, many nations strive to maintain some balance when it comes to trade regulations, seeking to find the perfect balance between regulating the flow of trade and keeping impediments to that trade within reason.

Shifts in the wants and needs of consumers may also trigger decreases in aggregate demand. This is especially true if newer technology is supplanting a product that was once a prominent part of the economic community. As consumers decide that certain products are no longer useful or desirable, the demand for those products decreases. Should those consumers choose to limit their consumption of alternatives due to cost or other factors, this could mean the overall demand for certain types of products decreases and remains so for some time.

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Discussion Comments


Isn't one of the larger factors that cause aggregate demand to decrease the availability of credit? In the most recent recession, we saw tightening credit standards as a response to record mortgage defaults, an uptick in bankruptcies and other events that made it clear that credit was too freely available in some instances.

Lenders tightened their standards, thus reducing the amount of credit available and slowing down sales on houses, cars and all sorts of consumer goods.

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