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

Identify the components of Aggregate Demand. Explain the impact on an economy of a rise in interest rates,

Extracts from this document...

Introduction

Economics HL Mr.Bell Max Müller-Berg 2.01.2012 Economics holiday prep: a) Identify the components of AD briefly explain 2 factors which might determine each of these components. b) Explain the likely impact on an economy of a substantial rise in the level of interest rates. a) The components set phrase of aggregate demand are C+I+G+(X-M). C stands for the consumers’ expenditure on goods and services, which are separated in two parts: Durable commodities and non-durable commodities. In the UK over sixty-five percent of aggregate demand consists of household expenditure. I is the capital investment. Thereby is meant the investment spending by companies on capital goods (Objects like equipment and buildings) and working goods (stocks of finished goods and work in progress). Another very important component is represented with G, which is called the government spending. This is the government spending on state-provided goods and services. Through this the government can control AD to a certain amount, so the spending is affected by the developments in the economy and their changing political aims and priorities. ...read more.

Middle

So the confidence plays quite a big influencing role. Another influencing factor could be a sudden boom in the housing market, which would cause a chain of effects. So at first the consumers have indirectly more money, because their house has now a bigger merit than before. Therefore they would increase their household expenditure. Furthermore the companies would also increase their investment spending ? especially on buildings ? because they now see a huge potential in this business. On the other hand the government spending would decrease, because they would try to demagnetise the boom to minimize the level of inflation. The imports would probably rise, because of the greater spending of money by the consumers. The only component which would maybe stay the same is the export component. But even if it stays the same, the net exports would still change. That is the reason why the government plays such a big part in the aggregate demand, so that they can avoid that such factors influences the components that massively. ...read more.

Conclusion

The problem is, even if all conditions are given now, if the consumer doesn?t have the confidence to buy, the economy would still decrease and the money which the government spent in the circular flow of income would be useless. In the third situation the economy would be in a totally standstill. So the economy is already in a bust period and would still decrease, which would cause a recession and would make the consumers even less confident then before so that they would consume less as well. That would have a grave effect on the country?s economy, which is sometimes unstoppable, which in turn could lead to a currency depreciating. So as a conclusion a substantial rise in interest rates can have two different effects. On one hand it can calm the economy down if the fear of inflation is too big and if there is no potential economy gap left, but on the other side in every other situation it would drag the economy down and reach lower supply and demand points than before. Therefore the general most likely impact of higher interest rates is, that the economy reaches a level with a lower productivity (lower demand and supply level). ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate 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 International Baccalaureate Economics essays

  1. World Economics assignment. The core economic issues that are focused on in this ...

    In Cambodia, the unemployment is usually very high with very little industry because most people work on their own small plots of land. The social, cultural and religious patters within these countries are barriers to mobility and change(28). Analysis on Element 15 The impact of multi-national firms on NICs and LDCs may be broadly similar.

  2. Economics HL - IA

    to (A). Nevertheless, the gains to producer are enough to exceed that of consumers. As mentioned in the article, the Swedish economy is in an expansionary phase, meaning that people have more money between their hands to spend. At the same time, the prices of various Swedish products are increasing.

  1. Assess the impact of a run on the dollar and a US recession on ...

    Stock Market Crash causing a decline in GDP the US would want to boost demand within the economy by increasing X and decreasing M. Y� = C + I + G + (X� - Mv) The Treasury could make US goods more price competitive to countries abroad by devaluing it's currency through a reduction in the interest rate (r).

  2. Fair Trade

    Ironically it is precisely during this timeframe that Malaysia experiences its travel peak, as huge numbers of tourists enter the country for festivities, and holidays just like New Year's Eve, Chinese New Year, and Hari Raya that all occur throughout these months of the year.

  1. Imperial Tobacco predicts 3% revenue rise

    The marginal benefit is the same for both the pre-rolled and the self-rolled cigarette, because the products are essentially the same. The self-rolled cigarettes are cheaper, so their financial cost is lower. The personal factor in this equation is how much the personal discomfort of rolling cigarettes is valued with money.

  2. The luxembourg Economy (Complete Review)

    Column 2: World Bank (2009d). "World Development Indicators". Washington DC: World Bank. Luxembourg- Quality of life and Social indicators CONTINUED In more recent years, international uncertainty has caused a halt in growth rates and has substantially slowed production in Luxembourg. Following the crisis the nation faces weaker performance and an adverse effect on its living standards.

  1. Evaluating interest rates

    But it is the borrowers that need the money in order to consume and they will not be able to do so anymore. Rising interest rates also have another effect which is to increase the value of the currency. This is because if one country will raise its interest rates

  2. What is the impact of the Notional Interest Tax Deduction system on investments in ...

    Since these two macroeconomic objectives are considered to be of extreme importance for every country in modern society, this tax system was first created and drafted between January 2004 to 2005 and was applied as from the 2006 tax year.2 Recently the Notional Interest Tax Deduction System has been in the press on various occasions.

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