In order to combat this deficit spending, taxes are increased to generate more revenue to pay off this spending. In response, consumers will spend less money and save more, thus causing a decrease in consumption and less money in the economy. Soon, there is a decrease in investment because products are not being sold. Prices drop, and the economy lowers into a recession.
Therefore, if MPC and consumer confidence is at a low, consumers will spend less and save more therefore resulting in a decrease in total consumption levels. This consequently will result in an increase in taxation, as there is a decrease in the circular flow of income, meaning governments have to increase taxes in compensation for the lack of spending. Due to this taxation increase the level of real disposable income, or RDI, amongst consumers will decrease and therefore decreasing consumer
Leftward shifts of a downward-sloping demand curve, or decreases in demand, result in lower prices. Such a decrease could be caused by: a fall in income, assuming the good is not inferior; a decrease in the price of a substitute good or an increase in the price of a complimentary good; an expectation of low future prices or of a decrease in income; or a decrease in the number of buyers. Any of these actions in a market would decrease demand, and decrease the equilibrium price. On the other hand, a rightward shift of the demand curve, or an increase in demand, raises the equilibrium price. The opposite changes in the same factors that cause a decrease in demand can result in an increase in demand and an increase in prices.
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).
The effects of a fall in consumer wealth will be to reduce confidence and consumer spending; equity withdrawal will slow down sharply – this has been a significant contributor to increasing AD in UK). Therefore, falling house prices will cause a fall in AD and is likely to cause a recession. This occurred in 1991 and 1992 when falling house prices caused a recession 2. Reduce House Price Volatility To prevent a house price crash, in the future, the government needs to reduce house price volatility and speculation. For example, the government could try these policies Encourage Fixed Rate Mortgages – Makes mortgages less sensitive to interest rate changes.
The opposite occurs for a balance of payments surplus. However, the extent to which this occurs depends on the price elasticity of demand for exports and imports on the Marshall Lerner Condition. This condition states that devaluation (a fall in the value of the currency) will lead to an improvement on the current balance will be seen if the combined elasticities of demand for exports and imports are greater than 1. The size of any J-curve affect in the short run will also affect this extent. The J-curve effect is a short term
Concerning increasing the profit, if they can reduce in trade promotions and prices, normally the market share and the profit will be increased. In terms of reducing cost, when they reduce in trade promotions, cost will be decreased because
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. To counteract this problem, analysts typically adjust dollar figures to account for inflation. Figures that have not been adjusted for inflation are said to be in 'nominal dollars,' while those that have been adjusted are in 'real dollars. Using the nominal dollar does not give the correct short run cost estimaate. Following graph depicts the effect of inflation on cost One of the method firms use for adjusting for inflation is by deflating nominal cost data using an implicit price deflator.
It could therefore be said that an increase in the incomes of consumers could cause the bus operators revenue to decrease due to a fall in demand. This would indicate that the bus driver should close the service. Price elasticity of supply measures the proportionate response to changes in quantity supplied to a proportionate price change. A price elasticity of supply value of +1.15 means that the bus service has a more than proportionate response in supply to a change in price. The positive sign basically shows that higher prices will
One of the functions of money is as a store of value. How does inflation affect money's ability to store value? (3-6 sentences. 2.0 points) Inflation can affect the value of money to drastically decrease. inflation causes the value of something to go down.