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

Aggregate Demand and Aggregate Supply.

Extracts from this document...

Introduction

AGGREGATE DEMAND AND AGGREGATE SUPPLY a. What are the determinants of Aggregate Demand and Aggregate Supply? Aggregate Demand: Aggregate demand is the total of all expenditures made within a country at an average price level. There are four main factors that influence the aggregate demand and can cause a shift in an aggregate demand curve. This are: consumer spending, investment expenditure, government spending and net export expenditure. They can be represented through this formula: AD = C+I+G+NX Consumer spending makes up the larges part of aggregate demand, which is between 60% and 70%. These include private spending on: durable goods such as cars and electronic goods, non-durable goods such as provisions, clothes, and literature, and services such as education, insurance, healthcare and entertainment. Consumer spending is strongly influence by the amount of disposable income, household wealth, interest rates and the expected future of the economy. Investment Expenditure makes up a smaller portion of the total aggregate demand. It is easily influence by interest rates which cause higher borrowing costs and thereby lower profit. Government expenditure is affected by the demand of public goods and services by the private sector through voting or other political activities. Net export expenditure is the exports (expenditure of other countries on the country's goods and services) ...read more.

Middle

From the short-run aggregate supply curve one can observe that the shift upward indicates the output stays the same while the price increases from P to P1. b. Explain the difference between demand-side and supply-side policies. Demand-side policy: Demand-side policy is used to stabilize the economy by changing the aggregate demand. When there is a lack of demand the aim of the government should be to increase it. The most important demand-side policies are fiscal and monetary. When using fiscal policy the government tries to influence the level of economic activity through controlling government expenditure and taxation. To stop recession and boost the economy, direct and indirect taxes are cut or there is an increase in government spending. This will shift the aggregate demand curve upwards from AD to AD2. In order to reduce the level of demand in the economy and to help reduce inflation, the taxes will rise or government spending will be reduced. Such actions will cause the aggregate demand curve to shift downwards from AD to AD1. Monetary policy is used to control the level of the money supply and interest rates to influence the economic. When the economy is at recession the central bank will increase the economic activity through decreasing reserve requirements, buying government securities or lowering the interest rates, which will shift the aggregate demand curve upwards. ...read more.

Conclusion

Which of the policies above do you consider to be the most useful? Explain your answer fully. Both the supply-side and the demand-side policies are useful; however, they can be used to achieve different effects. The demand side policies work quickly because the increase in money supply is done directly through interest rates, taxation, etc. Within the next 6 month. It is used to deal with short term problems such as inflation or unemployment. Yet, it is very hard to predict an accurate outcome and the situation might go out of control. Supply side policies take much longer time and reduce the pressure on prices and increase employment. They are safer and should cause a gradual improvement in the economy. Demand side policies can be effective when there is little economic activity. But when the economy grows and there is more economic activity demand side policies become less effective because _____________________________________________ ________________________________________________________________________________________________________________________________________________so when the economy is doing well we need the supply side policy. However, demand-side policies often have supply-side effects and vise versa, therefore it is very important to take them in account. Tax decrease may cause less work effort according to the Laffer Curve. At the same time even though supply side policies often increase efficiency they may also cause inequity to raise. Supply-side policies are basically designed to improve economic activity in the long run, while the demand-side policies are used in the short run. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics 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 GCSE Economy & Economics essays

  1. Peer reviewed

    Components of aggregate demand and its benefits.

    3 star(s)

    ** GOVERNMENT EXPENDITURE is the demand made by government. It changes as the type of taxation changes and is also affected by political situation in the country.

  2. Labour is a derived demand because the demand for labour is a result of ...

    Firms offering employees more flexible working hours, generous holiday leave entitlements and a pleasant working environment are more likely to attract labourers to their industry. The opportunity of travel and experiencing a different culture is offered by some jobs,

  1. Supply side policy.

    to families on low incomes with at least one person in employment The National Minimum Wage The introduction of a national minimum wage seeks to boost the incentive for people to actively search for work. Over 2 million people in traditionally low paid jobs have seen their pay levels affected directly since the minimum wage was launched.

  2. Use the multiplier to explain how an increase in any component of aggregate demand ...

    This further increases demand and so on. Therefore the initial effect of aggregate demand is multiplied by an increase in the income of consumers and demand for consumer goods. The operation of the multiplier effect can be shown using an example, but assuming that investment and savings are the only injections and leakages respectively.

  1. The demand for cars.

    owners who will be upgrading to a four-wheeler, due to rising income and necessity of car for personal transportation purposes. Therefore, excluding the owners of mopeds, the potential demand for cars in the next fifteen to twenty years can be taken as 50% of the existing two-wheeler population of around 28mn units.

  2. Retailing In India - A Government Policy Perspective

    permitted in Indian retailing in a phased manner, and the retailing sector should be granted industry status on a priority basis. Apart from these, the report also suggests several related reforms in areas like labor laws, real estate, bureaucracy, taxation and supply chain regulations.

  1. What is aggregate demand? Explain what determines the main components of aggregate demand?

    Consumer expenditure is influenced by the rate of interest in the economy. When prices increase, consumers and firms need more money to buy the same number of goods and services as before. Hence the demand for money increases. An increase in demand will raise the price of money because consumers are competing to borrow money from the financial institutions i.e.

  2. Evaluate the Monetarist's Explanation?

    Therefore the price level depends on the money supply. This is a very simple insight into how the quantity theory of money works. Monetarists believe in this theory and they believe that the government should control the money supply to influence the price level.

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