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Aggregate Demand Essay

1091 words - 5 pages

Aggregate Demand and Supply Models

Aggregate Demand and Supply Models
After deducting taxes and living expenses from wages earned, the amount of income an individual or household has remaining; this amount is the consumer income. Therefore, when consumers maintain a steady income, he or she probably will spend more. Similarly profitable businesses will increase their employment level and also increase current employee’s salaries. Existing effect on economic factors are wealth, population, this refers to how much money a consumer spends and how many individuals have money to spend (Tuttle, 2003, p. 11).
Example; when the economy is high the government will increase taxes causing ...view middle of the document...

247).
Some additional effects of fiscal policies are that the upper class currently will continue to pay taxes when the middle and lower class may not have to pay any taxes. Keynesian and classical models apply to short and long-term focuses on the government decision to boost or slow the economy (Colander, 2010, p. 229).
Interest Rates
A major reason for why aggregate demand goes through slopes in a downward position because of interest rates. Interest rates are rates paid or owed for the value and use of money that a person borrows from lenders. In economics interest rates are used as a measurement of the cost of borrowing money and the changes of the cost which has a great effect on economics aggregate demand. When interest rates change capital investment are usually effected in a negative way. Capital investment are asset such huge companies or expensive homes, that do not need replacement or having to put work in it for a long period of time. As interest rates rises the lower cost of borrowing usually decrease capital investments.
When this happens there is also an effect on how much a consumer spends. When high interest rate occurs within a business it increases the purchase of supplies, which can lower the amount of spending and borrowing. In the United States consumers borrowing and spending is a huge factor in aggregate demand. The treasure of the United States determines the interest rates in the market force. An increase in interest rate decides how much money supply there is in the world. An interest rate reflects on savers incentives , which makes them save to oppose to lending or spending (Colander, 2010, p. 234).
Fiscal Policies
The “Fiscal Cliff” is an important aspect of the fiscal policies recommendations for 2013. As of January 1, 2013, if there is not an agreement on the reductions it may cause an economic upheaval. The Democrats are pushing for an extension of unemployment benefits. According to Salon Media Group, Incorporated (2012) stated the following:
White House officials have assured Democrats that Obama is committed to extending them another year, at a cost of about $30 billion, as part of an agreement for sidestepping the fiscal cliff and reducing the size of annual increases in the federal debt. (para. 6)
The main issue is tax increases that will be the biggest increase in history. The Obama plan wants to increase the wealthy, and the republicans believe this...

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