The LM Curve will see a shift to the left and decrease the value of "Y" if the IR is higher than the ER of the market. The GDP is increasing in value and there will be an increase of savings.. If the IR was below the equilibrium, the opposite of the previously stated would occur. The LM Curve would see a shift to the right, therefore increasing the value of "Y". The GDP value would then decrease, due to the move from Point A to C, and increase employment which would decrease savings.
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.
Therefore, when the aggregate demand compared with the economic production capacity is quite low, expansionary monetary policy should be taken into use appropriately. Negative monetary policy is to reduce the level of aggregate demand by cutting the growth rate of money supply. In this policy, it is difficult to obtain the credit and the interest rate increases as well. Therefore, when the inflation is serious, the negative monetary policy is more appropriate. (Stanley Fischer,1993) Monetary policy includes seven aspects: I. controlling the amount of currency issue.
Economics Using a diagram explain how the government can use fiscal policy to alter the level of A.D (aggregate demand) in the economy? * Aggregate demand is the total spending on goods and services in a given time period. Aggregate demand curve has the total quantity of all goods and services and average price levels for all goods and services. The aggregate demand curve shows the relationship between Average Price Levels and Real Output. 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.
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.
Macroeconomic activity Is defined is the study of the economy as a whole, especially whether resources of the society are being used efficiently as possible and whether the ability of the country to satisfy it wants is growing over time. Aggregate supply refers to the value of goods and services that can country can produce. Aggregate demand means the total amount of spending in the economy by groups such as: consumers, business firms, the government and people from overseas who buy our goods and services. If aggregate demand is to high then problems such as inflation occur because the amount of people who want to spend exceeds the amount of goods and services that can be produced. However if aggregate demand is low, the society faces slow growth and unemployment.
Should the government allow the peso to fall even farther to stimulate exports? Why or why not? The fall in the value of the peso led to hyperinflation and bank collapses, adversely affecting business ventures for companies in Argentina. As a direct result, trust in the peso diminished and companies invested in the US dollar because of its widely trade availability. It is not surprise that
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
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.
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.