Part of The Student Room Group

  • 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

or


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. Economics HL - IA

    This part will be exported. The total welfare is hence increased to (A+B+C+D), showing the gains from trade. Even though, there is an overall benefit from exporting, consumers will be worse off. According to the graph, their surplus will decrease from (A+B)

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

    Increase foreign investment, if the UK join the single currency system, direct inward investment should be attracted because the reduction of uncertainly there is not the need to calculate demonstrate the UK pound(24). Disadvantages For the UK government, changes from old currency may be costly; the government needs spend additional money, like, purchase the new equipment and staff training.

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

    Washington Post 19/11/05 By buying up US treasury bonds economies such as Japan, China and Korea have been able to keep their exchange rate with the $ favourable through keeping demand for the $ high. This has enabled these countries to maintain substantial current account surpluses with the US by running a capital account deficit with the US.

  2. Fair Trade

    world, plenty of its colonial structures in its center, a vivacious Chinatown with street vendors all across, and a lively Little India. The city has an interesting mix of elegant architecture decorating the whole city, merging antique colonial buildings with soaring skyscrapers.

  1. Imperial Tobacco predicts 3% revenue rise

    The smoker's choice to buy either fine-cut tobacco and rolling paper or pre-rolled cigarettes is based on a basic cost benefit analysis he makes without even knowing he is doing it. This is a simple diagram comparing marginal cost and marginal benefit of another cigarette.

  2. What has been the impact of globalisation?

    but also encourages a convergence of communication and style among diverse people throughout the world. The process of cultural globalization preferred by the international elite is one that incorporates the world community as consumers of goods and services produced, developed, and distributed by transnational corporations ? that is, consumerism of the western model is the dominant process of cultural globalization.

  1. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    This wealth disparity is assumed to expand further and further as the proletariat class expands at a much more rapid pace than the bourgeoisie class. Marx believed these gradual but certain changes in class are going to lead the capitalist system to self-destruction.

  2. Notes on the aggregate demand and aggregate supply curves

    Consumption What is consumption? Consumption occurs whenever consumers purchase goods or services. Consumption is measured by the amount of money spent by all consumers. When you buy lunch, that is consumption. What are some factors that impact how much consumption there is in the U.S.

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