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

Answer related to the article , In the following article , I want you to co...

In the following article , I want you to comment on the type of market structure and whether Kinked Demand apply and what will possibly be the market share for GM and VW? ""In case

Explain why each of the following factors may influence the, Explain why ea...

Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether consumers regard the commod

Game Theory, Three People choose whether to contribute a fixed amount towar...

Three People choose whether to contribute a fixed amount toward the provision of a public good. This good is provided if and only if at least two of them contribute. If it is not p

Long run economic profits, 1. Igora's pizzeria want to know if it should st...

1. Igora's pizzeria want to know if it should stay open this spring. Total Revenue will be $ 12,000 per week and Total Cost will be $ 18,000 per week. The fixed cost of running the

Time value of money, My current car gets 10 miles to the gallon and no resa...

My current car gets 10 miles to the gallon and no resale value, but it will last 5 years for sure. I can always buy a new car for 8000 dollars that gets 20 miles to the gallon. A g

Consumer behaviour, Establish relationship between production and cost for ...

Establish relationship between production and cost for a firm operation in perfect competition market in case of i phone

Macroeconomy, Adding the economic activities of government to the circular ...

Adding the economic activities of government to the circular flow model shows that: 1. Government spending creates inflation 2. Government purchases of goods and services,

Shifts the market supply curve, This firm will maximize profits by producin...

This firm will maximize profits by producing the level of output that corresponds to point: a. b. c. or d. ??   Refer to Figure for a perfectly competitive firm. Given the

Demand and supply, During the 1990s, technological advance reduced the cost...

During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use of supply and demand diagrams, how the following markets are affected in terms of

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