What is the effect of increased business confidence on aggregate demand?

Increased business confidence typically results in higher levels of investment spending. When businesses feel optimistic about future economic conditions, they are more likely to invest in capital goods, expand operations, and hire more employees. This injects more funds into the economy as businesses seek to enhance productivity and generate future profits.

This increase in investment translates directly to higher aggregate demand, as businesses purchase new equipment, buildings, and technology, and pay for services, which amplifies economic activity. Additionally, increased investment can lead to job creation, further raising incomes and encouraging consumer spending, which also contributes to aggregate demand growth.

Therefore, when business confidence rises, it stimulates investment, which is a key component of aggregate demand, reinforcing the link between business sentiment and economic performance.