If there is spare capacity (negative output gap), then demand side policies can play a role in increasing economic growth. For example if we decrease interest rates, we will increase the demand in the economy as people have more money as their mortgage costs are decreased. It is the same idea with lowering taxes - this will boost demand, as people have more money to spend as less is taken away from them by the government. Aggregate demand is made up of consumption (consumer spending, Investments Government spending and Exports (minus) imports (Net exports). If anything affects these factors will result in affecting the demand.
There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy. When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/ or lower taxes. A recession results in a recessionary gap meaning that aggregate demand is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).
At last, achieve aggregate demand and aggregate supply to be an ideal balance. Monetary policy is divided into two types: expansionary and tightening. Aggressive monetary policy is to stimulate aggregate demand by increasing the speed of the money supply growth. In this policy, it is easier to obtain the credit, and the interest rates will reduce. Therefore, when the aggregate demand compared with the economic production capacity is quite low, expansionary monetary policy should be taken into use appropriately.
However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run. In general, expansionary monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) in the quarters ahead; tight or contractionary monetary policy is designed to slow the economy in the future to offset inflationary pressures. Likewise, expansionary fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run, while contractionary fiscal policy, tax increases and spending cuts tend to slow the rate of future economic expansion. Question 2 The workings of Monetary and fiscal policy The aim of all governments is to achieve and maintain economic growth and price stability. However, when the economy is in an inflationary situation, there is the need to implement policies to reverse this trend; these policies are referred to as contractionary fiscal policies.
It further goes on to say that immigration would affect both aggregate demand and supply levels of the economy. The article shows the different ways migrants would affect different areas such as labour supply, job search, capital stock, technology and so on. According to the author, inflow of migrants would definitely increase the level of demand and supply in the economy. It would also boost consumption levels which would in turn increase production levels. The article suggests that the key point to be considered is whether migration would add to the inflationary pressure in the economy.
Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
How does inflation affect money's ability to store value? (3-6 sentences. 2.0 points) If inflation is increasing, which means the value of money is going down; It may make sense to invest the money in investments that are likely to increase in value. 5. Imagine that you are considering moving to a new country and looking for a job there, but you first want to make sure the country has a strong economy.
These are designed to increase the level of AD and increase in national income. Lower taxation/higher government spending or lower interest rates will encourage more consumption. The diagram shows an increase in real GDP (economic growth) and a falling output gap. We would expect there to be a fall in unemployment. Therefore two objectives have been met.
There are several ways in which changes in interest rates influence aggregate demand, one of the main changes are through the housing market & house prices. For example higher interest rates increase the cost of mortgages and eventually reduce the demand for most types of housing. This will slow down the growth of household wealth and put a squeeze on equity withdrawal (consumers borrowing off the back of rising house prices) which adds directly to consumer spending and can fuel inflation. Another situation where the monetary policy increases AD is through disposable incomes of mortgage payers. For example, if interest rates increase, the income of homeowners who have variable-rate mortgages will fall – leading to a decline in their effective purchasing power.
Fiscal policy concerns the use of changes in the amount of taxation (T) and government spending (G) to influence the national economy. Changing G will directly affect aggregate demand as AD calculated through the equation AD = C + I + G + (X-M). Not only does fiscal policy affect AD but also aggregate supply, however the affect on AD will be much more immediate whereas AS is affected indirectly over a longer period of time. Monetary policy concerns three main methods of government intervention in an economy; changing the money supply, changing interest rates and the exchange rate. Monetary policy will also indirectly affect AS, as well as directly affecting AD.