Aggregate Demand Expectations,
Fiscal and Monetary Policies
Aggregate Demand Expectations:
Expectations about future income, future inflation and future profits
change aggregate demand (shift).
Increases in expected future income increase people's consumption
today and increases aggregate demand.
A rise in the expected inflation rate makes buying goods cheaper today
and increases aggregate demand.
An increase in expected future profits boosts firms' investment, which
increases aggregate demand.
Aggregate Demand Fiscal and Monetary Policy:
Fiscal policy (tax, transfer payments and G):
A tax cut or an increase in transfer payments increases households' disposable
income - which increases consumption expenditure (C ) and aggregate
demand.
An increase in government expenditure (G) increases AD.
Monetary Policy (interest rates and quantity of money):
An increase in the quantity of money increases buying power and increases
aggregate demand.
A cut in interest rates increases expenditure and increases aggregate demand.
World Economy:
The world economy influences aggregate demand in two ways:
1. A fall in the foreign exchange rate lowers the price of domestic goods
and services relative to foreign goods and services, increases exports,
decreases imports, and increases aggregate demand.
2. An increase in foreign income increases the demand for domestic
exports and increases aggregate demand.
Fiscal and Monetary Policies
Aggregate Demand Expectations:
Expectations about future income, future inflation and future profits
change aggregate demand (shift).
Increases in expected future income increase people's consumption
today and increases aggregate demand.
A rise in the expected inflation rate makes buying goods cheaper today
and increases aggregate demand.
An increase in expected future profits boosts firms' investment, which
increases aggregate demand.
Aggregate Demand Fiscal and Monetary Policy:
Fiscal policy (tax, transfer payments and G):
A tax cut or an increase in transfer payments increases households' disposable
income - which increases consumption expenditure (C ) and aggregate
demand.
An increase in government expenditure (G) increases AD.
Monetary Policy (interest rates and quantity of money):
An increase in the quantity of money increases buying power and increases
aggregate demand.
A cut in interest rates increases expenditure and increases aggregate demand.
World Economy:
The world economy influences aggregate demand in two ways:
1. A fall in the foreign exchange rate lowers the price of domestic goods
and services relative to foreign goods and services, increases exports,
decreases imports, and increases aggregate demand.
2. An increase in foreign income increases the demand for domestic
exports and increases aggregate demand.
