If anything affects these factors will result in affecting the demand. For example, if inflation is getting too high, interest rates will be increased to stabilize the economic growth in the economy. This is the result of having the economy already close to full capacity which means that a further increase in AD will mainly cause inflation. Demand side policies include monetary policy and Fiscal policy. Monetary policy are actions of central bank, currency board or other regulatory committee that determines the size and rate of growth of the money supply, which in turn affects interest rates.
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 the same time, the government may choose to cut taxes, which will indirectly affect the aggregate
Before we explore how a reduction in the interest rates leads to an increase in consumption we must first define what it exactly means to consume. Mainstream economists such as Tim Harford define consumption as the spending by house holds on consumer products and services. As the interest rate decreases it leads to consequential reactions on behalf of consumers, one of these actions is an increase in the level of goods consumed. This is a result of it being cheaper to borrow money from banks and other financial institutions, this meaning purchases which have been prolonged or “put off” by consumers can now be readily purchased. This is an effect of a lower opportunity cost as the overall cost associated with borrowing has decreased and the marginal benefit of saving has increased, meaning consumers will receive more of a benefit if they purchase goods on credit based agreements opposed to saving, leading to an increase in the amount of credit transactions.
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.
As the law of accumulation increases wages for workers, the numbers of the working class will increase. As the population of workers increases, its size becomes a stimulate, pushing wages down. As a result of lower wages, profits for the capitalist will rise again, and accumulation will continue. The two laws are broken down into different concepts that Adam Smith goes into great detail about. The division of labor becomes a major theme in what and how Adam Smith interprets and describes to us about the economic world.
Within this essay, I will be discussing the advantages of this happening as well as the disadvantages that may occur. Furthermore, to understand the question, we must first understand what economic growth is. It is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Firstly, the propensity to consume will increase. This is because the proportion of income spent for the poorer is higher so the redistribution of income will increase consumption and therefore increase aggregate demand.
An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward. This is indicative of diseconomies of scale. For further increases in production beyond this minimum, marginal cost is above average costs, so average costs are increasing as quantity increases. As for the short run average cost curve, initially it is worth producing more, as you are making use of the fixed resource(e.g., reezit machine). however, as the law of diminishing return sets in, it is more costly to produce the extra unit of output.In the short term, there is at least one fixed unit of input that cannot be changed, and because of that, the law of diminishing return applies, saying that as you add successive units of labour into a fixed input, the marginal return diminishes over time.
We can conclude that they use FIFO because the inventory amount increases through 06 in 65% and then decreases in 07 by -13%. The rise in prices in 2006 is the reason why the inventory is more expensive because the increase in purchases was not as big as the increase in inventory price. If they used LIFO the inventory in 2006 would not have