Monday, January 24, 2011

aggregate demand curve


Basically along and off the demand curve depend on price level of the economy. If price level is varying or change then we can tell the situation as movement along. On the other hand when price level is fixed or constant then the condition will be known as off or shifting the aggregate demand curve.
Factor that affect shifting the demand curve –

Factors are –
Monetary policy
Fiscal policy
External variables.
Monetary policy: The objective of monetary policy is changing output level through increasing or decreasing the money supply and manipulation of interest rate.
Effect of monetary policy:
↑ Money supply →↑ real money balance →↓ interest rate →↑ investment →↑output.
↓Money Supply →↓ real money balance →↑ interest rate →↓ investment →↓ output.
↓Interest rate →↑ investment →↑output.
↑interest rate →↓investment →↓ output.
Fiscal policy: The main components of fiscal policy are Govt. spending and taxation.
Effect of fiscal policy:
↑Govt. spending → income ↑→ savings ↑→↑investment →↑output.
↓Govt. spending → income ↓→ savings ↓→↓ investment →↓ output.
↑Tax rate → income ↓→ savings ↓→ investment ↓→ output↓
↓Tax rate → income↑→↑ savings →↑ investment → output ↑
Exogenous or External variables: The important external variables are foreign output, asset values, technology & oil price.
Effect:
Foreign output ↑→↑ consumption →↑ export →↑ income →↑ output.
If foreign output is decreases the condition will be reverse.
Asset value ↑→↑ income →↑ output
Asset value ↓→↓ income →↓ output
Technological advancement ↑→↑ investment →↑ output.
Oil price ↑→ Net export ↓→ income ↓→ output↓
And the reverse condition if oil price reduces.
N.B.=Here net export=export-import

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