The Components for Aggregate Demand are C (consumption)+ I (income)+ G (government spending)+ (X-M) (net exports) and a change in the components of Aggregate demand will cause a shift of the curve. Fiscal policy is a type of economical intervention where the government injects its policies into an economy in order to either expand the economy’s growth or to contract it. By changing the levels of spending and taxation, a government can directly or indirectly affect the aggregate demand. Fiscal policy can be used in order to either stimulate a sluggish economy or to slow down an economy that is growing at a rate that is getting out of control. There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy.
Gross domestic product, adjusted for inflation, also known as "real GDP", can tell economists whether an economy is growing or contracting from year to year or from quarter to quarter, a key determinant in deciphering whether the economy is expanding or in a recession. Internationally, gross domestic product adjusted for some benchmark, usually the US dollar, is a good indication of whether a nation's economic output is increasing or shrinking relative to other nations of the world. To exactly know if GDP is a good enough indicator of understanding an economy, it should be compared to an equivalent form of indicator. This is where we come across GNP which is quite similar to GDP. So let us understand what GNP is in order to compare these two entities.
Short-run cost functions should be estimated using data for which the level of usage of one or more of the inputs is fixed. Usually time-series data for a specific firm are used to estimate short-run cost functions. Analysts should be careful to adjust the cost and input price data (which are measured in dollars) for inflation and to make sure the cost data measure economic cost. The following are the two possible problems that may arise when measuring cost for short-run cost estimation: Correcting data for the effects of inflation Economic analyses often use data from two or more calendar years. Price inflation causes the value of a dollar to fall over time, and so the same dollar amount in two different years will usually represent different amounts of purchasing power.
Lower the income tax, which gives citizens more money to spend, and buy more services from civilian-owned businesses, which creates more jobs. -- In the diagram above, what will happen if the government sets the price for potatoes at point A? There will be a surplus of potatoes. -- The government sets the price of wheat for the coming year above the equilibrium price. What effect would this have on supply and demand?
Monetary Policy in Automotive Industry The Effects of Inflation on the Automotive Industry In the United States, the economy is what drives the lifestyle of the people who live. There are two extremes, inflation and a recession. “Inflation can be defined as the overall general upward price movement of goods and services in an economy” (Bureau of Labor Statistics, March 1, 2012). A recession can be described as a general slowdown in the activity of the economy. According to Brue (2010), monetary policy is defined as a central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.
Demand side policies are those that manipulate the level of aggregate demand (AD) to achieve one or more economic objective. The policies can be fiscal policies (changes in government spending and/or taxation), or they might be monetary policies (which are largely changes in the short-term rate of interest). The four major macroeconomic objectives are a sustainable level of economic growth; low inflation; low unemployment; and a medium term balance on current account. Recently the government have used loose fiscal policy and the MPC have reduced the rate of interest. These are designed to increase the level of AD and increase in national income.
The crisis began with the Great Depression, as argued by Abramovitz (2004) it was the collapse of the American economy in the 1930s that led to the rise of the welfare state. This change in the welfare state meant a stronger response from the government was needed. The economy counted on the government to offer a New Deal that would restore profits by fostering economic growth. The New Deal focused on programs that would provide relief for the poor, such as AFDC or Food Stamps and Social Security for the unemployed, retired or disabled. The New Deal also focused on the recovery of the economy to normal levels and reform of the financial system to prevent a repeat depression (Chen 2013).
1. Does the Audi division of Volkswagen appear to be achieving economies of scale, constant economies of scale, or diseconomies of scale? At first glance it would appear that Audi is experiencing diseconomies of scale. As diseconomies of scale occurs when a company experiences an increase in marginal cost when output is increased. Audi's global sales rose 8.3% to 1.58 million vehicles in 2013 however despite the increase in revenue, the net profit fell 7.7% ($5.57billion) and the operating profit margin fell to 10.1% from 11% the previous year.
For consumers, interest rates represent the available funds they are willing to borrow to satisfy today’s needs. For businesses they represent the cost of borrowing money to invest in the growth of a company. Interest rates affect the economy. As the Fed raises or lowers short-term interest rates, banks may raise or lower the interest rates they charge borrowers, including the prime rate (Northrop Grumman, 2009). Changes in the prime rate may affect the whole economy.
Evaluate the effectiveness of demand-side policies to reduce inflation Plan: * Define demand-side policies and inflation * Differentiate between fiscal policy and monetary policy * How they can be used to reduce inflation – changing tax, government expenditure, changing money supply and altering i/r and exchange rates * Explain the benefits / downsides of using demand-side policies against using supply side measures and physical policies Demand side measures, or demand management, are policies used to reduce inflation by altering aggregate demand and are usually associated with Keynesian economics. Inflation is the persistent or continuous rise in the general price level or a fall in the value or purchasing power of money. It is usually measured using a consumer price index. Demand-side policies can be divided into two different types of policies; fiscal policy and monetary policy. Fiscal policy concerns the use of changes in the amount of taxation (T) and government spending (G) to influence the national economy.