Explain the factors affecting Aggregate Demand (AD), given the context of Singapore. 
Aggregate Demand (AD) and Aggregate Supply (AS) represent the supply and demand of all goods and services for an economy. The level of national output and the general price level are determined by the intersection of AD and AS.
AD refers to an economy’s total demand for domestically produced goods and services for a given general price level. AD = C + I + G + (X – M), where C represents consumption, I represents investment, G represents government expenditure, X represents exports, M represents imports, and (X – M) represents net exports.
Real output and the general price level is determined by the intersection of the AD and AS curves. The AD curve is downward sloping because the lower the general price level, the greater the quantity demanded for domestic outputs.
As AD = C + I + G + (X – M), what affects the AD curve is the factors that influence each individual component, C, I, G and (X – M). An increase in any of them would shift the AD curve to the right while a decrease would shift the AD curve to the left.
Consumption refers to household’s expenditure for goods and services. Consumption is affected most by income and wealth. When the economy is booming, rising wages, rentals, profits and interest raise households’ incomes which will then increase consumption. On the other hand, higher personal income taxes and social security contributions lowers the disposable income, thus dampening consumption. Wealth consists of savings and assets. A booming stock or property market pushes the value of assets up, thus making household feel that they are wealthier which would then cause them to consume more thus increasing consumption level. Conversely, if the stock or property market faces a downturn, households will feel that they are less wealthy, they will consume less, thus causing consumption to decrease. As wealth also consists of savings, it is thus also affected by taxes such as property taxes and capital gains taxes. The higher these taxes are, the lower the consumption level. Since AD = C + I + G + (X – M), a rise in consumption will increase AD thus shifting the AD curve to the right, a drop in consumption will decrease AD, thus shifting the AD curve to the left.
Investment refers to firms’ spending on capital goods. Investment is affected most by business expectations. If a firm expects the demand for its goods to rise, it is likely that the firm would invest more to boost the future capacity. This would thus increase investment level, since AD = C + I + G + (X – M), a rise in investment would increase AD thus, shift the AD curve to the right, a drop in investment would decrease AD, thus shifting it to the left.
Government expenditure refers to the government’s spending on publicly provided goods and services. Government expenditure consists of government spending on public goods and services; the amount that government spends depends on the economy. Since AD = C + I + G + (X – M), a rise in government expenditure would cause a rise in AD, thus shifting the AD curve to the right, conversely, a drop in government expenditure will cause a drop in AD, thus the AD curve will shift to the left.
Exports refer to foreign purchases of domestically produced goods and services while imports refer to domestic purchases of foreign produced goods and services. Factors which affect exports and imports are the usual factors which affect demand and supply, such as taste and preference, disposable income, and prices of related goods. Export may rise due to foreigners developing a preference for a country’s exports, possibly due to better marketing or better quality of goods produced. On the other hand, if other countries promote their products more, or have better or new products, the home country is expected to face rising demand for imports. Since AD = C + I + G + (X – M), a rise in exports would increase AD thus shift the AD curve to the right, if there is a drop in exports, the AD curve will shift to the left as AD decreases. A rise in imports would also cause a drop in AD, thus shifting the AD curve to the left, while a drop in imports would cause an increase in AD, thus shift the AD curve to the right.
Examples in Singapore include Singaporean households, when they have more disposable income. They would have the tendency to go out shopping and spend more on clothes and material goods, This causes a rise in consumption, as AD = C + I + G + (X – M), a rise in consumption would shift the AD curve to the right. Firms in Singapore such as hotel 81 will spend money investing in land to build their property on. This causes a rise in investment level, and since AD = C + I + G + (X – M), this would shift the AD curve to the right. The government in Singapore spends money on public services such as defence, this increases government expenditure thus causing AD to rise which then shifts the AD curve to the right Singapore. Singapore also has exports and imports, examples are like exports of electronics and imports of water from Malaysia. This constitutes to (X – M) thus, a rise in net exports would rise AD, thus shifting the AD curve right, while a drop in net exports would decrease AD, thus shifting the AD curve left.
In conclusion, the factor that affects AD are the factors which affect consumption, investment, government expenditure, imports, and exports. Examples of these factors in Singapore are like disposable income, where families would spend more when they have more disposable income, investing in land, government spending on defence, and imports and exports like water and electronics.