Question

Explain the Aggregate Demand in an open and closed economy.

Answer 1

In an economy, Aggregate Demand is equal to the Aggregate Expenditure, meaning the demand of goods and services in a particular year in an economy at a given level of Income and employment, is called Aggregate Demand. 

The Aggregate Demand has 4 components in an open economy :

1. Consumption Expenditure
2. Investment Expenditure
3. Government Expenditure
4. Net-Exports (X – M)

Therefore, the Aggregrate Demand in on open economy is based on these four components.
Aggregate Demand = C + I + G + (X-M)
But, in a closed economy, Aggregate Demand is equal to (C + I).