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.
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
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.
Contractionary B. Monetary Policy i. Expansionary ii. Contractionary V. Conclusion A. Effectiveness of Fiscal Policy and Monetary policy FISCAL POLICY VS MONETARY POLICY The goal of macroeconomics is to stabilize price levels, have low unemployment, and economic growth. In order to attain these goals, governments use policies to influence the economy.
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.
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.
Discuss the effectiveness of the monetary policy in increasing AD (25 Marks) The monetary policy involves changes in the base rate of interest to influence the growth of aggregate demand, the money supply and price inflation. Monetary policy works by changing the rate of growth of demand for money. Changes in short term interest rates affect the spending and savings behaviour of households and businesses and therefore feed through the circular flow of income and spending. Monetary policy influences the decisions that we make about how much we save, borrow and spend. 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.
If unemployment falls, less people will be claiming unemployment benefits and other similar pay-outs from the government, this will allow a lot of tax to be spent on other things, such as expanding public services further, which also leads to an increase in living standards. Another benefit of economic growth is the increase in confidence, with all these new goods and services on offer to the country, the consumer
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.
These countries, which were considered developing nations or third world countries have emerged from the global economic crisis as the new face of world economic powerhouses. As the effect of monetary turmoil deepens, in Europe and United States; two conflicting economic theories and solutions for this crisis have emerged. One theory favors the “pumping of money” or stimulus money into the economy which in certain economists views represents a “stalled engine”, which needs more gas. The extra money means, people will have more money to spend, which in turn mean more demand for products which will lead to the creation of more jobs which will make the economy grow again hence stimulating the economy. The other theory is tightening of the belt or Austerity measures.