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EC 202 - Essay Example

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Whenever Aggregate Planned Expenditures (APE) is equal to GDP, the Aggregate Supply of Funding (ASF) will represent the ADF. As there is a mismatch between APE…
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EC 202
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EC 202

Download file to see previous pages... If there is a disparity between the level of APE, GDP and ADF, then an automatic macroeconomic coordination process gets under the way by bridging the gap between the levels of those variables. When ASF and ADF become unequal, macroeconomic stabilizers will maintain the equilibrium level through the process called funding adjustment. Similarly if there is an imbalance in GDP and APE, producers of goods and services will make output-price adjustment that closes the gap between GDP and APE.
To understand the notion of funding adjustment, we first need to divide the domestic consumers into three groups. In the first group, we include individuals who have sufficient money balances to cover for their planned expenditures. The second group comprises of individuals who have insufficient balance to cover for their planned expenditures. The final group of individuals includes individuals who have more than sufficient balance to cover for their planned expenditures. The second group can finance their purchases through either borrowing or reducing their GDP purchases. The third group can utilize their excess funds by lending them and earning a profit or either increasing their planned expenditures.
In an economic scenario where ASF equals ADF, the second and third group will not be cognizant of the economic imbalance; however, they will be aware of their individual funding situations. The amount that the second group is willing to borrow exactly equals the amount that the third group is willing to lend through their excess funds. Hence this process will not impact the level of interest rates in the economy. In the case if ADF exceeds ASF, the second group will fulfill their funds demand by borrowing and the third group will lend their excess funds. The financial intermediaries such as banks and financial institutions will play a central role by taking the funds from third group and lending them to the second group. Since the funds available in the hand of the third ...Download file to see next pagesRead More
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