1. Explain why a change in one component of aggregate demand will cause the aggregate demand curve to shift by a multiple of the initial change. There are four components of the aggregate demand, and any one of these four components might influence the aggregate demand in a very profound way. Let’s take a look at a fictitious situation where the government decides to build some infrastructure, to finance the project the government will have to increase the spending. The area where the infrastructure will be built, sees influx of builders, who will collect salaries, and will have spendable income. In addition to that, the local building material suppliers will see increase in the amount of business, as well as the food stores, gas stations, …show more content…
A reduction in nominal wages A reduction in nominal wages will limit the amount of personal disposable income, as such it will decrease the aggregate demand. Furthermore, the short run aggregate supply will follow, which in effect will decrease the demand even further. c. A major improvement in technology A good example will be the information technology revolution over past two decades. We have witnessed an increased demand for the now goods based on the new technology, and we have seen decreased demand for the outdated goods. In the end the economy comes to equilibrium, and the new technology usually benefits the majority of consumers. d. A reduction in net exports A rapid reduction in net export, could lead economy to a recessionary gap; for the reason that once the manufacturers loose some of its market share, usually they are left with few choices. One of them is to reduce its output, and in most cases lay off some of the workers, which will lead to a reduction in disposable personal income, which will cause reduction in aggregate demand, and once again it will cause decrease in aggregate supply. The multiplier influences aggregate demand both ways; so an initial reduction in spending will cause additional reductions in spending down the
There are a couple reasons why the aggregate-demand curve slopes downward. The first is the wealth effect. If the prices are higher, the money one has is worth less. It can be put into perspective by looking at it on a microeconomic level. For example, if you have a $20 bill, and the price for a ham sandwich rises from $5 to $10, you can only buy two sandwiches, rather than four. This shows that lower wealth leads to lower consumption, lower consumption leads to lower production, which means less workers will be need, leading to layoffs. The second reason is the interest-rate effect. As the prices rise, so do the interest rates. Higher interest rates hold down thing...
With average income decreasing, consumers have the incentive to save, lowering GDP. With the economy starting to fall interest rates will fall and a domino effect
First of all the stadiums and the teams always seem to be a great contender for positive economic development jobs focusing on helping the economic growth of a city. However, this is different from other economic improvement devices like tax credit, sports stadiums, soccer pi...
We the consumer would rather pay less for any product that is needed or want. Ultimately we are the reason for high prices as well as low prices. Prices of products do not always stay the same and more popular products have higher prices than less popular products. These fluctuations, high prices and low prices are from the idea of supply and demand. Supply and demand defines the effect that the availability of a particular product and the desire or demand for that product has on price. Generally, if there is a low supply and a high demand, the price will be high (Investopedia). To understand the idea of supply and demand, the understanding of supply and the understanding of demand must be defined. The Law of Supply states that at higher prices, producers are willing to offer more products for sale than at lower prices, also that the supply increases as prices increase and decreases as prices decrease (Curriculum Link). The Law of Demand states people will buy more of a product at a lower price than at a higher price, if nothing changes, at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price and that at lower prices, people tend to buy some goods as a substitute for others more expensive (Curriculum Link). In todays economics these ideas are seen frequently in everyday life. The laws of supply and demand are seen in many ways in the company Apple Inc. Each year Apple Inc unveils a long awaited mobile operating system and IPhone. We can also see many aspects of the law of supply and demand in Nike Inc’s Jordan Brand. Jordan Brand has released a number of...
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
be the increase in jobs. Creation of new jobs will take place in the manufacturing
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
... Also important is the price of complements, or goods that are used together. When the price of gasoline rises, the demand for cars falls.
Another economy growth, related to tourism, is the building of hotels, new homes, re-developments, office complexes, condos and mansions. By providing housing and resorts for tourists, the attraction will not only pull in tourists, but it will provide economic structure.
In economics, the fiscal multiplier is the ratio of a change in GDP due to change in government spending. When this multiplier exceeds one, the enhanced effect on GDP is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in GDP greater than the increase in government spending.
Many countries in the world have been suffering a recession in their economies and UK has not been an exception. A recession is a macroeconomic term describing one of the two business cycles that economies go through. The business cycles is characterized by either a boom where there are more business activities carried with a rapid economic growth and points of recession where there is retardation min economic growth. Various aspects and factors contribute to economic growth, which is measured through GDP. This factor may include savings, investments government spending plus other factors within either an increase or a decrease. Reduction in spending may lead to a recession while a n increase in spending may lead to expansion that is a boom in the economy.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
In the short run, other things being equal, a decrease in demand will lower the price and cause a contraction in supply.
The combined expenditure for the ARRA is five hundred forty three billion dollars. The first expenditure is directly related to the fiscal policy of taxes. In this case, the tax expenditure has the intention to stimulate the economy by increasing disposable income for individuals as well as corporations. The second and third most important expenditures of the ARRA directly relate to the fiscal policy of public expenditure. These public expenditures had the intent to stimulate the economy because it would increase jobs therefore increasing disposable income and aggregate demand. This stimulus package for the great recession was closely related to Keynesian economics because it required a high level of government intervention in order for the economy to recover. The stimulus package depends heavily on government spending which is a key aspect in Keynesian economics. In order to achieve this, the ARRA focuses on increasing tax refunds which is a way of government spending. As well as spending money on healthcare and education. These three expenditures stimulate the economy through government
Because of the GDP growth too fast, increased wages of some citizens will lead to higher demand as consumers spend more freely. This will imply that the supply and demand will be increased and it will occur the shortage of supply. Business must hire more employees and further increasing demand by increasing wages. The increased demand will face of shortage supply and quickly forces prices up.