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Aggregate Demand and Spending Decision November 29, 2015

Posted by OromianEconomist in Uncategorized.

Odaa OromooThe economic (business cycle)

Aggregate demand is the total amount that consumers, businesses, government, and foreigners are willing to spend on all goods and services in the economy. Changes in aggregate demand occur when any or all of these groups expand or cut back their spending plans. These changes range from:

An increase in consumption that may be caused by

  • a rise in income levels,
  • a decrease in interest rates,
  • a house price inflation.
  • a rise in the level of government spending.
  • a balance of payments surplus.

What Happens If An Increase In Aggregate Demand Occurs?

Suppose that the economy is in “normal times,” neither in a recession nor in a boom, so that real GDP equals potential GDP. In theory, firms could respond to the greater demand for their goods either by expanding output or by raising prices. In practice, firms do not raise prices in the short run. Instead, they expand output, and the economy enters a boom.

But prices are not fixed forever. Over time, if demand stays high, firms raise their prices and the boom ends. If aggregate demand falls, the reverse occurs. In the short run, firms lower output instead of cutting prices, and the economy enters a recession. Over time, if demand stays low, prices fall and the economy recovers. Read more at:-

Source: Aggregate Demand and Spending Decision


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