lailapianai
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Analyse the factors that will lead to an increase in AD in an economy, and discuss whether this increase is more likely to have an impact on inflation or unemployment in that economy

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Pato1
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  • Exchange Rates: When a country's exchange rate increases, then net exports will decrease and aggregate expenditure will go down at all prices. This means that AD will decrease.
  • Distribution of Income: This is directly related to wages and profits. When worker's real wages increase, then people will have more money on their hands because their overall income has increased. When this happens they tend to consume more causing the consumption expenditures to increase.
  • Expectations: Consumers tend to have certain expectations about the future of the economy and will adjust their spending accordingly. If they would expect the economy to not do so well in the future, saving would increase thus decrease overall expenditures. Rising price levels will cause aggregate demand to increase. If consumers foresee the price level to rise in the near future, they might just go out and buy that good now, increasing the consumption expenditures in AD. Many different expectations have the capacity to increase or decrease aggregate demand and it is not always clear as to how this will happen.
  • Foreign Income: This relates U.S. economic output with the income of its trading partners in the world. When foreign income rises, U.S. exports will increase causing aggregate demand to increase.
  • Monetary and Fiscal Policies: The government has some ability to impact AD. They can spend money or increase taxes in order to influence how consumers spend or save. An expansionary fiscal policy causes AD to increase, while a contractionary monetary policy causes AD to decrease.
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BrownieLover
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Also interest rates and tax rates
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cutelady
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(Original post by lailapianai)
Analyse the factors that will lead to an increase in AD in an economy, and discuss whether this increase is more likely to have an impact on inflation or unemployment in that economy

Exam stress is taking its toll
Well first, to analyse the factors that will increase AD, it would be all the components that make up AD, therefore it would be consumption, investment, government expenditure, exports and imports. Then you go through each component and evaluate the effect that it would have on inflation and unemployment. For example an increase in consumption will shift the AD curve to the right, leading to an increase in the price level causing inflationary pressure. Hope his helps


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lailapianai
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Thank you!! It help a lot 😓


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MagicNMedicine
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(Original post by cutelady)
Well first, to analyse the factors that will increase AD, it would be all the components that make up AD, therefore it would be consumption, investment, government expenditure, exports and imports. Then you go through each component and evaluate the effect that it would have on inflation and unemployment. For example an increase in consumption will shift the AD curve to the right, leading to an increase in the price level causing inflationary pressure. Hope his helps
Good idea to structure around C+I+G+(X-M).

For inflation and unemployment, it depends on the amount of spare capacity in the economy, ie how close you are to full employment. If there are a lot of unused resources then increasing AD will lead to those being used, so unemployment will fall. However if unemployment is low then there might be shortages of labour in some areas which will restrict the ability of firms to produce more to meet the additional demand. In this case prices will rise. So the closer we are to full employment the more you might expect inflationary pressures.

Also good to think carefully about the exchange rate. A depreciation of the exchange rate should increase AD through an increase in net exports (more X, fewer M), and a shift in domestic consumption towards domestic goods rather than foreign goods. It might also lead to higher inflation as imported goods will be more costly so if a lot of raw materials, food, energy etc are imported then higher prices will be an issue.
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pumbting
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(Original post by lailapianai)
Analyse the factors that will lead to an increase in AD in an economy, and discuss whether this increase is more likely to have an impact on inflation or unemployment in that economy

Exam stress is taking its toll
When answering questions like this I think its important to think about the short term/long term, and the supply side. So certain policies could increase AD in the short term, but increase unemployment and inflation in the long term. Also a way to evaluate most things is by evaluating in the supply side, increases LRAS and reduces inflation, allowing sustainable growth and increases in AD. Also another evaluation for this is would an increase in inflation be bad? So now we have such low inflation, it could benefit our economy.
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Edminzodo
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Low interest rates?
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