Defining Aggregate Demand and Aggregate Supply

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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.

Firstly we can see that C, I, G and X are positive while the M component is negative. This is because the consumption level will have a positive effect since consumer buying goods raises the money flow in the economy. Investment will also have a positive effect since more companies investing will raise the level of money available as more companies buying factories will have a positive effect since they will be able to buy bricks to build the factory raising demand for bricks. Government expenditure has a positive impact since it means that for example consumers will have more money to spend if G is in the form of benefits. Exports, X. has a positive impact since foreign countries buying the products made by the UK for instance will raise the money flow in the UK. M, imports, however has a negative impact since the level of money inside the UK will fall as it flows abroad due to the purchasing of foreign goods.

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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. ...

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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.

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.

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.