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Introduction:
Almost all countries seek stable growth as one of their macroeconomic goals. However, economies act like two sides of the coin, with growth and decline. Integrating Aggregate Demand.An economy cannot grow and grow until it burst like a bubble.
Hence, the forces act as a catalyst to create a balance between growth and decline. Integrating Aggregate Demand.Besides, investment has become a key to economic growth and long-term development of the economy. Let us examine the basic concepts related to the economy.
Aggregate demand is basically the combination of individual demands. According to Nordhaus, aggregated demand is the total quantity of output/yield that is readily purchased at a given price level, keeping other factors constant.
Quantity demanded is the basic building block of aggregate demand: quantity demanded is defined as the actual quantity of goods purchased at a particular point in time at given price. Aggregate demand (equilibrium level) is dependent on four major factors i.e. consumption, investment, government spending and net exports.
GDP (Gross Domestic Product) is the market value of all final goods and services newly produced during a specified period within the border of the country by whoever. Growth in GDP is referred to as economic growth of a country.
Integrating Aggregate Demand.A total population of a country is divided into three parts; under 16, not in labour force and labour force. Unemployed people are the part of the labour force, which are capable and are actively seeking work. Inflation is the persistent increase in prices in an economy.
It means that with the same amount, fewer goods would be purchased than before. A balance of payment is primarily the record of all transactions between the residents of particular Country and the rest of the world during a certain period of time. All these factors affect the aggregate demand during the course of business fluctuation.
Understand the mechanism of a business cycle and aggregate demand, it is important to understand the basic concepts of movement along the aggregate demand curve and a shift in the aggregate demand curve. When the price level increases, the real disposable income falls; which leads to a reduction in real consumption expenditure.
The most important factor which affects price is the money supply by a central bank. When the central bank keeps the money supply tight, money becomes scarce and its demand increases. Consequently, interest rate rises and it becomes difficult to get credit. Hence, the investment and consumption decreases which create a diminishing effect on the real output of the economy.
The AD is the aggregate demand before the change in some external factor such as war, military spending etc. This would increase the factor G (government expenditure) of aggregate demand and thus the AD curve would shift out or will move rightward.
Similarly, as the military budget is cut down or the government spending would decrease; the Aggregate demand curve would shift in or leftward. We can more precisely say that at the same level of…
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