Level of aggregate demand in economy, Microeconomics

Assignment Help:

Q. Level of aggregate demand in economy?

Demand-pull inflation takes place when there is an increase in level of aggregate demand in economy. Aggregate demand comprises five components that are defined in following equation:

AD = consumption + investment + government spending + (exports - imports)

When there is an increase in one of the components - investment, consumption, government spending or exports - the level of economic activity in economy will rise and real national output will surge. This will be signified on a diagram as AD shifting to right. Though as aggregate demand increases there will be greater pressure on resources and firms supplying services and goods may face the problem of excess demand specifically if production capacity is limited. This will consequence in businesses increasing prices and/or employing more overtime workers less efficiently to satisfy demand. The higher prices will feed in the inflation indices RPI and CPI as the price level rises at the same time as GDP growth takes place (providing there is spare capacity in economy).

Demand-pull inflation has been caused mostly by the growth in consumption spending, caused by rising levels of disposable income that in turn stems from a combination of increased employment, lower interest rates, tax cuts, easy credit as well as increased household confidence.


Related Discussions:- Level of aggregate demand in economy

Choose a topic from microeconomics ., choose a topic from microeconomics th...

choose a topic from microeconomics that matters to you and find a recent news article covering that topic?

What is the difference between economics and business, What is the differen...

What is the difference between economics and business?  Economics is the study of how we, the people, engage ourselves in production, distribution and consumption of goods and

Neer vs reer, NEER Vs REER: In a situation where there are multiple tr...

NEER Vs REER: In a situation where there are multiple trade partners, the effect of cross-currency movements are judged by nominal effective exchange rate (NEER) and real effe

Introduction, when does market equilibrium occur?

when does market equilibrium occur?

Assignment, what is the theory of second best ? prove the theorem with the ...

what is the theory of second best ? prove the theorem with the help of a diagram .

Perfect competition, Perfect Competition It's a market where conditions...

Perfect Competition It's a market where conditions prevail like that buyers and suppliers are without the ability to manipulate price in any significant way such that the marke

Functions of the adb, Functions of the ADB: ADB finances principally s...

Functions of the ADB: ADB finances principally specific projects in the region. It may make loans to or invest in the projects concerned. It may also guarantee loans granted t

Monopoly, Let''s assume that a monopolist decides to maximize revenue, rath...

Let''s assume that a monopolist decides to maximize revenue, rather than profit. How does this operating objective change the size of the deadweight loss?

Economics, what is the differences between utility theory, indifference the...

what is the differences between utility theory, indifference theory and revealed preference theory

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd