Inflation

As AD increase within the economy, we near full capacity. Resources in the economy get scarcer and as a result producers are able to raise their prices and achieve bigger profit margins because they know that demand is running ahead of supply. Furthermore wages may increase as there is shortages of labour. This as a result may lead to demand pull inflation and eventually accelerated inflation. (Unsustainable economic growth). This means that.....

can someone help expand/ edit this chain of reasoning , thank u

Reply 1

idk01

What is the question you are trying to answer? As this will determine how you'll link your point back to the question.

Reply 2

jeriu

Original post by Fhutton17

What is the question you are trying to answer? As this will determine how you'll link your point back to the question.

wat are the eefcets of An increase in AD

Reply 3

a gudetama

Effects on economy can be categorised into economic growth (actual and potential), employment, inflation and BOP. A rise in AD can be due to rise in consumption, investment, government expenditures or net exports.
AG: when AD rises, it would lead to a multiplied increase in AD via the multiplier effect. Assuming the economy is operating below full capacity, real national income would increase more than proportionately. If the rise in AD is due to greater investment in workers, productivity of workers would increase, output per unit labour would increase, resulting in fall in cost of production. AS would shift downwards, resulting in an increase in NY.
PG: when AD increases due to greater investment in the economy, it would lead to greater stock accumulation, which increases the productive capacity of the economy. AS would shift rightwards, resulting in PG.
Employment: increase in AD would lead to an unplanned fall in stocks, resulting in greater demand for factors of production. Since labour is a derived demand, demand for workers would increase, thus reducing cyclical unemployment. If the rise in AD is due to greater investment in the labour force, structural unemployment would decrease too.
Inflation: Assuming the economy is producing near full capacity, an increase in AD would cause supply bottlenecks to appear in the economy as producers try to outbid one another for limited factors of production. Producers would pass on these increase in costs to consumers in the form of higher prices, resulting in a rise in general price level. If consumers expect prices to rise further, consumers, as rational decision makers, would increase current consumption levels, which increases AD further. As a result, GPL would rise further leading to demand-pull inflation.
Balance of payment (BOP): if the increase in AD is due to an increase in net export value, current account would improve, leading to an improvement in BOP position.

Hope this helps!! I think for macro questions, it is a lot easier to break down “effects on the economy” into the above.

Edit: under the point of inflation: however, if the rise in AD is due to a rise in investment, the outward shift (rightwards and downwards as explained above) of the AS curve would alleviate cost-push inflation, thus reducing the impact of inflation. This would lead to sustainable long run economic growth.

Inflation

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