Answer to Question #126499 in Macroeconomics for Anawero Anas

Question

With the aid of diagram/diagrams discuss four fiscal policies and four monetary policies that can boost aggregate demand.

Answer 1

Factors that either boost or cause a decline in aggregate demand (AD) are those that affects real GDP.

In the image:

AD1-initial graph of aggregate demand (AD)

AD2-negative shift or decline in aggregate demand: caused by a decrease in real GDP

AD3-positive shift or boost in aggregate demand: caused by an increase in real GDP

The factors are fiscal and monetary policies which are related to government spending and taxation and money supply, respectively.

Examples of fiscal policies are: consumer investment, household income, taxation, and government spending.

1) Consumer investments: a rise in the levels of consumer spending cause an increase in productivity, a rise in real GDP,and a boost in AD

2) Household income/wealth: a rise in household income or wealth cause a boost in AD. A rise in household wealth means that there is more to spare directed to investments and hence cause an increase in productivity, a rise in real GDP, and thus a boost in AD.

3) Government spending: a fall in government spending cause a boost in AD since the government focuses on development such as improved infrastructure. Improved infrastructure may translate to a rise in productivity, real GDP, and thus a boost in AD.

4) Taxation: an example of a form of taxation is income taxes. a decline in income taxes means that consumers have disposable income and hence able to invest. A rise in levels of investments cause an increase in productivity, real GDP, and thus a boost in AD.

Example of monetary policies are inflation rates, interest rates, employment, and net exports.

1) Net exports: as the domestic price levels of goods falls, the price levels of foreign goods rises and thus a fall in demand for exports. Since net exports is a value of real GDP, the real GDP increases and so does net exports.

2) Interest rates: a decrease in interest rates causes a rise in levels of investment and hence a rise in productivity and real GDP.

3) Inflation rates: an increase in rates of inflation causes a rise in real spending since the value of money increases. The change in inflation results in a positive or right shift in aggregate demand.

4) Employment: availability of more jobs means an increase in household income or wealth. This may lead to an increase in levels of investments, productivity and hence a rise in real GDP.