Aggregate demand represents the planned expenditure on final goods and services in an economy during a period of time.
There are four components of aggregate demand (AD):
(i) Private Consumption Expenditure (C). It is the most important component of aggregate demand. It refers to the total amount of expenditure incurred by the households on the purchase of final goods and services to satisfy their wants.
(ii) Investment Expenditure (I). It refers to the expenditure incurred by the private firms on the purchase of capital goods such as plant and equipment, construction work, etc.
(iii) Government Expenditure (G). It refers to the expenditure incurred by the government on the purchase of final goods and services. The level of government expenditure is determined by the government's policy.
(iv) Net Exports. Net exports is the difference between exports and imports. It shows the effect of domestic spending on foreign goods and services (Imports) and foreign spending on domestic goods and services (Exports).

Following are the three elements important in the determination of investment:

(i) Expected returns or revenue - An investment is undertaken on the basis of expected demand or expected returns to the producers.

(ii) Costs - It has three components viz, cost of purchase of equipment,(depreciation) and cost of funds borrowed for investment.

(iii) Business expectations - Bullish expectations attract more investment. Bearish expectations result in low investment.

Additional Investment Required = RS.2000

Y = 4100, C = 2100.

Y = 2000, C = 900

(i) Y = RS.32000
(ii) C = RS.29000.

The excess of Aggregate Demand above the level required to maintain equilibrium in full employment situation in an economy is termed as inflationary gap. It causes inflation and increases price levels in an economy. When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. This short fall is termed as deflationary gap. It causes reduction in prices in the economy. Inflationary and deflationary gap can be corrected by opting following means:
 (i) To correct the inflationary gap, government should form fiscal and monetary policy to close the gap. Monetary policy can be used in such a manner that it will contract the money supply in the economy by raising interest rates and opts the method of progressing taxation.
 (ii) To correct the deflationary gap, government should stood doing the additional expenditure equal to deflationary gap, so that deflationary gap is wiped out.

Under employment, equilibrium occurs when AS = AD, short of their full employment level. Measures to correct under employment equilibrium:
(i) Bank rate Central Bank should decrease the bank rate. A decrease in bank rate lowers the rate of interest and credit becomes cheap. Accordingly, the demand for credit expands and Aggregate Demand increases.
(ii) Open market operations By buying the government securities, the Central Bank injects additional purchasing power into the system which results in the expansion of credit. As a result, Aggregate Demand increased.

Consider the equation of a straight line of the form,
                       b = ma + e
Where, m > 0 is called the slope of the straight line, e > 0 is called the intercept on the vertical axis.
When 'a' increases by 1 unit, the value 'b' increases by 'm' units. These are called movements of variables along the line. The entity 'e' is called the parameter of the line.
As the value of m increases, the straight line swings upward, This is called a parametric shift of line.
(i) A positively sloping straight line swings or rotates downward as its slope decreases.
(ii) A positively sloping straight line shifts upward parallel when its intercept increases.

The steps involved in the derivation of the consumption curve (CC) from the saving curve are:
(i) Given the savings curve (SS), we can derive the consumption curve (CC) by drawing a 45° line from the origin.
(ii) Take distance OC (upper portion) on the Y-axis equal to as on the y-axis (Lower portion). This will give us the starting point. C of the consumption curve (CC).
(iii) Draw a \(\bot ^{ r }\) from point D, intersecting the 45° line at D.
(iv) Joint points C and B and extend the straight line CB upwards to obtain consumption curve CBC.