• 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...


´╗┐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.


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.


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. Marked by a teacher

    To what extent is economic growth desirable

    4 star(s)

    In an age of technological advancement and increased productivity, fewer workers are needed so that even in times of economic growth, unemployment is still relatively high. It is inevitable therefore that only a certain group of people benefit from growth, unless governments intervene with strong regulation and taxes to re-distribute wealth.

  2. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Wage controls are usually used on a brink of a recession as workers are less sceptical about accepting lower wages for job security. A good example of how wage controls have been used to lower inflation would be ... Price controls are very similar to wage controls, instead of dictating

  1. Peer reviewed

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

    4 star(s)

    Thirdly, a decrease in disposable income would also enable domestic consumers to spend less on imports.

  2. Peer reviewed

    Defining Aggregate Demand and Aggregate Supply

    3 star(s)

    A reform of the benefits system means that there will be lower benefits paid out or the time period of benefits is reduced. This means that workers are more inclined to go to work raises the level of goods and services produced in the economy.

  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. Budget 2004-05 and Economic Analysis of Pakistan

    TRANSFERS TO PROVINCES (NET) (Rs.in Million) 2003-2004 2004-2005 Classification Budget Revised Budget Divisible Pool 176372 176486 200880 Straight Transfer 38464 34925 38277 Special Grants/Subventions 32839 32423 35864 Project Aid 16920 12579 20800 Japanese Grant 91 90 90 Total 264686 256504 295911 Less payments to Federal Govt.

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    increases in the price level is only small and not great enough to be classed as inflationary. The UK government chooses to maintain a steady level of inflation and currently set their target at 2.5%, despite recent statistics showing that the rate of inflation is approximately 1.9%, as inflation can bring several economic costs.

  2. Various Macro-Economic Questions and answers

    With the ?extra? cash these workers all have, aggregate demand is increased very quickly and thus extra inflation comes in due to supply not being able to keep up in the short run. In a recession, as soon as GDP growth falls to a small/ negative quantity, investment stops as projections for the future are negative.

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