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DEMAND-DRIVEN BUSINESS CYCLES: Business cycle instability caused by changes in one or more of the four aggregate demand expenditures on gross domestic product--consumption, investment, government purchases, and net exports. This is one of two basic types of business cycles; the other being supply-drive business cycle. Demand-driven business cycles tend to be the more common of the two types. In general, demand-driven business cycles are more responsible for short-term instability, while supply-driven business cycles tend to be more closely associated with long-run changes in the economy.

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Lesson 13: Aggregate Demand | Unit 1: The Concept Page: 3 of 22

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  • How, first and foremost, aggregate demand represents expenditures made by all members of all sectors of our economy.
  • Aggregate demand is one side of the aggregate market (the AD/AS model) that's used to analyze national economic problems such as recessions, unemployment, and inflation, that might plague our economy.
  • How aggregate demand and the aggregate market are related to the circular flow model of the economy.

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NET-EXPORT EFFECT

A change in aggregate expenditures on real production, especially net exports from the foreign sector, that results because a change in the price level alters the relative prices of exports and imports. The net-export effect, also termed the international-substitution effect, is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are real-balance effect and interest-rate effect. The net-export effect is somewhat analogous to the substitution effect underlying the negative slope of the market demand curve.

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