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Defining Aggregate Demand and Aggregate Supply

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Introduction

Defining Aggregate Demand and Aggregate Supply First of all we need to start by defining Aggregate Demand itself. Aggregate Demand can be defined as the total demand in the economy for goods and services at a given time. The formula for Aggregate Demand is important in that is allows us to look at Aggregate Demand in detail. AD = C + I + G + (X-M) Before we move on we must define the components of this formula. AD is the Aggregate Demand. C is the level of consumption in the economy by consumers. I is the investment that occurs in the economy, done mainly by firms. G is the level of Government investment in the economy. X is the level of exports in the economy, while M is the level of imports in the economy. Now the arrangement of the formula is important too. ...read more.

Middle

Aggregate Supply is total level of goods and services produced by the home country. The intersection of both Aggregate demand and Aggregate supply is shown below. The intersection is the current level of output of services and goods in a country. The Aggregate demand and Aggregate supply can be influenced by supply side policies and demand side policies. These are policies such as Education and Training, Research and Development, Breaking Trade Union Powers, Benefits Reform, Welfare Reform, Labour Market Reform. We can analyse each one. Education and Training means that more money is invested by the government into the economy. This is done through investment into schools and other projects. Money can be given to local councils to invest into Schools for redevelopment. The government can also invest in training workers. For instance unemployed workers may be trained by producing more programs such as skills classes to improve the skills of workers so that they can be reemployed. ...read more.

Conclusion

A rise in C, I, G and X, while a fall in M would all raise the level of aggregate demand. Consumption could be influenced by lowering the interest rates for instance. This would make it cheaper for the consumers to borrow money on loans raising their spending through loan money. It also means that the savings rate will also fall, reducing the reward for saving, lowering savings in the bank and thus raising the level of money spent on consumer goods. The Government could also raise the level of invested it puts into the economy. This could be money taken from tax for instance and could then be reinvested into the economy. Lower interest rates could also encourage businesses to invest since the lower interest means that they too will borrow more money to fund investment into factories. Exports can be raised by subsidising companies that export goods, making it cheaper for them to export and also be more competitive abroad. Imports can be affected through the use of quotas. ...read more.

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Response to the question

The question here is a bit misleading, and I assume it's actually asking for an explanation of policies which affect aggregate demand and supply. It was nice to see a clear definition of aggregate demand and supply, as these are ...

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Response to the question

The question here is a bit misleading, and I assume it's actually asking for an explanation of policies which affect aggregate demand and supply. It was nice to see a clear definition of aggregate demand and supply, as these are often asserted in a question like this. I would note that asserting knowledge is never as good as being able to explain a concept, and in doing so you will always gain credit.

Level of analysis

The analysis here is sound. The definitions of both aggregate supply and demand are strong, and being to explain the components and factors which affect both shows a strong understanding. I like the use of a diagram to show the intersection, but I would be slightly more technical and call it the macroeconomic equilibrium. Showing a shift here would be wise, as it then shows the ability to refer to the diagram and display the necessary skills in analysing shifts and changes. The essay ably identifies the policies which affect aggregate supply, but these aren't explained well. For example, when talking about education and training, there is an awareness that the unemployed will have more skills. But, more importantly the concept of productivity needs to be discussed, allowing firms to increase the amount they supply at each price, thus shifting aggregate supply right. The discussion of trade union power seems to be a bit farfetched. It states that productivity will rise if workers have longer hours and lower rights, yet in my opinion a worker will have less morale! The exploration of policies which affect aggregate demand is stronger. The discussion of interest rates increasing consumption is good, as it explains the mechanism and each step clearly. I would note that without talking about fiscal policies (government spending and taxation) you will not get the top marks, as this is a major part of this discussion.

Quality of writing

The structure is good, progressing through a definition of aggregate demand and supply and then discussing what policies affect both of them. I am not keen on the style, for example "before we move on we must" is not the position I would take when writing an essay. I would much rather write "To best analyse the policies affecting aggregate demand and supply, it helps to look at the definitions of both". The way this essay is written suggests it is a journey, and I'm not sure it works well. Spelling, punctuation and grammar are fine other than this.


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Reviewed by groat 13/03/2012

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