• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand

Extracts from this document...

Introduction

´╗┐Macroeconomics is a branch of economics dealing with the performance structure, behavior and decision-making of the entire economy. The four key issues that macroeconomic addresses are economic growth, unemployment, inflation and the balance of payments and they are all relate one way or another to the total level of spending in the economy. This essay will describe the meaning by the term aggregate demand and analyze the short-term relationship between aggregate demand with those four issues as well as the relationships between the four issues with the business cycle. The term ?aggregate demand? can be described as the total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide and the curve is often downward sloping because at lower price levels a greater quantity is demanded. The formula for Aggregate Demand is important in that is allows to look at Aggregate Demand in detail: AD = C + I + G + (X-M) where AD is the Aggregate Demand; C is the level of consumption by consumers; I is the investment that occurs in the economy, done mainly by firms; G is the level of Government investment; X is the level of exports and M is the level of imports in the economy. ...read more.

Middle

Because the increase in the demand for output will lead to the demand for labour at each wage rate will grow and consequently cause an increase in total employment and therefore a reduction in unemployment. The government can attempt to influence the level of Aggregate demand through Fiscal policy and Monetary policy. If unemployment is relatively high then either interest rates can be lowered to expand demand (Monetary Policy) or, alternatively, the government could lower taxes and boost government spending (Fiscal policy). These measures will expand demand and lead to a fall in unemployment. For instance, when interest rates are low it is cheaper to borrow, which leads to higher consumer expenditure and higher investment in machines and buildings by firms. The overall increased demand helps creates jobs and helps reduce unemployment. Inflation refers to the rising in general prices levels. Money loses some of its value because its purchasing power falls. There are three main causes of inflation which are demand-pull, cost-push and money or the quantity theory of money. Demand-pull inflation is caused by continuing rises in the aggregate demand, it occurs when the growth in aggregate demand is so strong that aggregate supply cannot respond quickly enough. Cost-push inflation caused by costs rising for firms which are in turn passed on to consumers. Increases in the money supply will also lead to inflationary pressure. ...read more.

Conclusion

The low point of the cycle occurs next. This is known as a trough or a depression period. It is a large recession with the prices, interest rates and wages are all in their lowest, national income and expenditure decline. Therefore, unemployment tends to be at its peak and economic growth is in its low point. There may have a downward pressure on prices and leads to deflation. Low interest rates will also result in a lower exchange rate making exports become more desirable and imports less desirable because of the increased cost. This will tend to a lead to a current account surplus. The last phrase is the recovery where the economy starts emerging from recession. Business activities become more active and consumer will purchase more. Aggregate demand and prices will rise. As the results, unemployment will begin to decline and economic growth will increase but conversely inflation will start to grow and the balance of payment will again tend to fall into deficits. In conclusion, unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand as well as with each other and the success in achieving each of the objectives fluctuate with the course of the business cycle in the short-run. Therefore it is required governments to take into consideration carefully when making any decision in order to achieve or control any of these macroeconomic objectives. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    The minimum wage is an example of a wage control, as it is a law that states every worker must be paid a certain amount. In a period of high inflation governments will try to force lower wages. Although to the discontent of the worker lower wages will mean lower production costs which ultimately mollifies cost push inflation.

  2. Peer reviewed

    Discuss the effectiveness of fiscal policy measures in reducing aggregate demand?

    4 star(s)

    Firstly, the decrease in consumption depends on YED. A big change in disposable income would not necessarily bring a big change in consumption. If YED is elastic, that is true, but if not, consumption would not decrease as much as disposable income.

  1. Explain what the main macroeconomic policy objectives are and why are there problems when ...

    When incomes and spending are growing there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen. Full employment is achieved when the labour market has reached a state of equilibrium, when those

  2. What are the economic effects of inflation?

    Unemployment can also occur as a result of a worsening in the balance of payments deficit. If British goods become more expensive then fewer people abroad would purchase them. The other side of this is that British people would also purchase more foreign-made goods.

  1. What are the Government's main economic objectives?

    This may mean the government altering fiscal policy. The level to which they will borrow should be limited by their fiscal rules, not wanting to accumulate extensive national debt. Consequently, should the government want to maintain current investment in the economy, taxes may be risen at some point in the future to finance the expense on defence.

  2. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    shifts in the AS curve. If the firm face a rise in cost, they will respond partly in raising prices and passing the costs onto the consumer and partly by cutting back on production (there is a movement along the AD curve)' Monetarists believe that inflation is caused solely by the supply of money in circulation.

  1. What are the main macro-economic policy objectives?

    1979-the oil price rises, which affected by the slowdown in the world demand in the early 1990s. Inflation went down from 1970s - 1980s as well as the high unemployment, the unemployment levels often associated with lowering inflation are usual temporary.

  2. Various Macro-Economic Questions and answers

    If interest rates fall ? this lowers the cost of borrowing and the incentive to save, thereby encouraging consumption. Lower interest rates encourage firms to borrow and invest. There are time lags between changes in interest rates and the changes on the components of aggregate demand.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work