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.
First is GDP, or Gross Domestic Product. This measures everything that a country produces in a year. Second is real GDP, which removes the effect of price changes. This is a more accurate measurement of the country's actual output, because it removes the impact of inflation. This makes it the best way to compare the GDP for any year to prior years.
A better education and health care will improve the labors’ output, as productivity will be higher. Further to this, people will be more able to save more from their increase in income, which allows higher rates of investment and therefore increase in growth. The graph above is a PPF curve, which shows consumer goods against capital goods. Since there is an increase in Aggregate demand, this will potentially lead to an increase in economic growth as seen from the graph above. However, on the other hand an excessively equal
So output can expand and as long as less than full employment very little pressure for the price level to rise. This implies the economy is in a recession or depression and has excess capacity in production with large amounts of idle capital, labor and other resources. Thus if the economy increases output, price levels do not rise because there is so much unemployment and excess capacity already. Firms use idle resources and can increase output without driving the per-unit cost up and hence the price level. When the economy is operating beyond its full employment level of output then if the economy continues to expand there are no longer idle resources; that is all resources are being used since beyond full employment.
The richer people are the higher their APC. This is because if they have savings and investments, they don’t have to be as careful of unplanned costs. Next, if the consumer’s confidence is high, such as being optimistic about the future then the consumer is less likely to save for a rainy day and is likely to spend and consume more. Also, if interest rates are low then the consumer is less likely to save and thus spend more. Finally, age structure of the population drives consumption.
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
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
It is the latter however, that end up with the most capital in the long run. The advantage of free trade from a liberal perspective is the ability of the minority controlling the goods to ascertain more wealth than the majority manufacturing the goods. What Smith’s perspective does not take into account is why nations with more low-level workers are less prosperous than nations with more advanced means of production. Nations that have advanced technologically are better off because their means of production allow for more production from less workers, but cost more and are less appealing to those in control. This element relates directly to the disadvantage of a liberal perspective.
For example, if the prices levels are too high, manufacturers will hope to turn great profits and increase supply by making more products. However, these high prices mean consumers will want to buy less. On the other hand, if prices levels are too low, manufacturers will not want to make more goods. Consumers, however, will want to buy more at this low price, and a shortage may result. There are differences between shifts of demand/supply curves and movements along demand/supply curves.
Money wages will rise (wages are flexible to changes in price level), but since real wage is unchanged, neither the quantity of labor supplied nor demanded will change. LUCAS MODEL – some people do not know the aggregate price level but do know the nominal wage or price at which they can buy and sell. * Anticipated changes – Firms and workers expect the change in price. If both actual and expected prices will change in proportion to the change in money supply, the real money supply will remain unchanged, and the economy will remain at full employment. * Unanticipated changes – Expected price will not change.