Analyze the factors that will lead to an increase in aggregate demand in an economy, and discuss whether this increase is more likely to have an impact on inflation or unemployment in that economy
M/J13 Paper 21
With the help of diagrams, analyze the factors that will lead to an increase in aggregate demand in an economy, and discuss whether this increase is more likely to have an impact on inflation or unemployment in that economy. [12]
Aggregate demand is the total spending on an economy’s goods and services at different price levels in a given time period. It consists of 4 components which are consumption, investment, government spending and net exports. When curve for aggregate demand shifts to the right, it is an economic expansion because the quantity of output demanded for a given price level rises.
There are many factors which lead to an increase in aggregate demand. An increase in household wealth will cause an increase in aggregate demand. An increase in the value of share prices or housing market can lead to an increase in household financial wealth and an increase in consumer demand because it makes people feel wealthier hence spending more than before. Increasing asset prices also have a positive effect on consumer confidence, or an increase in expectations of future income and economy. When confidence increases, there will be a decrease in savings and consumers will be willing to spend more so businesses will invest more because of overwhelming demand and higher expected profits, shifting the aggregate demand curve to the right.
Furthermore, changes in monetary policy like changes in interest rates will affect financed consumption because it either makes borrowing money cheaper or more expensive. If interest rates fall it lowers the cost of borrowing and the incentive to save, encouraging consumption and encourages firms to borrow and invest more. A decrease in taxes like income tax will increase the disposable income of consumers which shifts the aggregate demand curve to the right; this is because it increases the amount of available cash of consumers to purchase more goods and services. While a decrease in business taxes increases
With the help of diagrams, analyze the factors that will lead to an increase in aggregate demand in an economy, and discuss whether this increase is more likely to have an impact on inflation or unemployment in that economy. [12]
Aggregate demand is the total spending on an economy’s goods and services at different price levels in a given time period. It consists of 4 components which are consumption, investment, government spending and net exports. When curve for aggregate demand shifts to the right, it is an economic expansion because the quantity of output demanded for a given price level rises.
There are many factors which lead to an increase in aggregate demand. An increase in household wealth will cause an increase in aggregate demand. An increase in the value of share prices or housing market can lead to an increase in household financial wealth and an increase in consumer demand because it makes people feel wealthier hence spending more than before. Increasing asset prices also have a positive effect on consumer confidence, or an increase in expectations of future income and economy. When confidence increases, there will be a decrease in savings and consumers will be willing to spend more so businesses will invest more because of overwhelming demand and higher expected profits, shifting the aggregate demand curve to the right.
Furthermore, changes in monetary policy like changes in interest rates will affect financed consumption because it either makes borrowing money cheaper or more expensive. If interest rates fall it lowers the cost of borrowing and the incentive to save, encouraging consumption and encourages firms to borrow and invest more. A decrease in taxes like income tax will increase the disposable income of consumers which shifts the aggregate demand curve to the right; this is because it increases the amount of available cash of consumers to purchase more goods and services. While a decrease in business taxes increases