AD/AS Summative Response

There are several things that the government can do about fiscal policy that will increase aggregate demand  (AD). AD, which is the total spending on goods and services at a given time at a certain price level consists of consumption, investment, government spending, and exports – imports. A period of time when you want to increase AD may be when there was deflation, where there were few demand on goods and services (eg. households buys fewer products). Or another scenario may be when there was a decrease in aggregate supply, which is the total amount of goods and services that all industries can produce at a certain price level. This fall in AS may have been caused by a natural disaster, or increase in wages that would need and increase in AD. Solutions to such scenarios are the fiscal policy, which are actions taken by the government that involve government spending and taxes to achieve the macroeconomic goals (price stability, external stability, growth, employment).

Figure 1 shows the increase shift in AD caused by changes in the fiscal policy. If the government increases government spending on goods and services such as school and hospitals, that would be one way of increasing AD. Another way is to decrease tax, specifically income tax. By decreasing income taxes, there would be more income for households to spend on, which will create and increase in AD.

So therefore, to increase the aggregate demand curve, there could be solutions made by changes in the fiscal policy that the government takes control of.

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One Response to AD/AS Summative Response

  1. Pingback: Portfolio Semester 2 | Kanako's Blog

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