Components and shifts of AD and AS, short-run and long-run AS, and the multiplier process.
Components of aggregate demand
AD = C + I + G + (X – M).
Consumption (C) — the largest part; depends on income, wealth, interest rates, confidence and the marginal propensity to consume.
Investment (I) — spending by firms on capital; depends on interest rates, expected demand/profits, "animal spirits" and the cost of capital.
Government spending (G) — set by fiscal policy.
Net exports (X – M) — depend on the exchange rate, relative prices and foreign/domestic income.
A change in any component shifts AD; the slope (downward) reflects the wealth, interest-rate and international-trade effects.
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