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Aggregate demand and aggregate supply - Essay Example

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Aggregate demand represents the demand for final goods and services within a nation at a specified time and price. It shows the purchasing power of goods and services of people within an economy at the given price…
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Aggregate demand and aggregate supply
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Aggregate demand and aggregate supply

Download file to see previous pages... Aggregate demand represents the demand for final goods and services within a nation at a specified time and price. It shows the purchasing power of goods and services of people within an economy at the given price.Policy makers within the economy must understand the concepts for the better allocation of resources. In many occasions, the government of a nation usually sustains the economy of a country using the fiscal policy. This happens on the demand side. Use of government expenditures in stimulating the economy is one of the significant activities that the government uses in stabilizing the economy. Additionally, the central bank can also stabilize the economy using the monetary policy. All these policies relate to aggregate demand and supply concepts. Thus, studying the topic will help in giving the policy makers with ideas on how to stabilize the economy. This paper will focus on the aggregate demand and aggregate supply. The writer, will analysis the topic basing on articles that discusses the topic. A conclusion, which assesses the topic basing the judgments on the articles, will follow. In most cases, the concept of aggregate demand and supply is very common within different nations and they employ various components of the concept in stabilizing the economy. The first analysis will focus on R.A Washington’s idea on “The stimulus question”, published in The Economist on February 2nd 2012. For many years, fiscal policy has formed a major subject within the political arena. People from various fields always question the advancement of the policy makers in their way to stabilize the economy. The questions rise because of the recession that affected the Americans intensely. The questions generally revolve around the significance of aggregate demand and supply in stabilizing the economy. The first inquiry is about the suitable time that the government should act to balance their budget. From the economic point of view, the government will always encounter problems in balancing the budget especially when the economy is in recession. Within this point, the revenues collected from the taxpayers reduce, as the government expenditure increases. There will be an imbalance at this point. Thus, the government will have to consider many things for the budget to balance. Putting in place various activities that will help in increasing the government revenue, the government will have to work harder on their spending, thus giving an automatic stabilization to the economy. Therefore, the balance process should be given time for it to act automatically. The second question revolved around the sustainability of government borrowing as a threat to the economy. True to the statement, too much of the government borrowing may pose a threat to the economy. The explanation behind this notion relies on the unwillingness of the private sector to lend to the government, thus affecting the economy. Contrary to the behavior of the economy, the private sectors will be affected. Since borrowing will be expensive to the private sector, the recovery process of economy will take long. An immediate stop to lending has an adverse effect to the economy of a country. The third topic inquires if discretionary fiscal policy can cause an increase in aggregate demand. Discussing this question requires many assumptions. Various economists have different ideas concerning the effect of discretionary fiscal policy to aggregate demand. In theoretical terms, the possibility is complicated, but empirically as the writer said, the policy can increase aggregate demand. The fourth question required a response if the policy makers ...Download file to see next pagesRead More
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