Answer to Question #216908 in Economics for Khwisti

Question

The Aggregate Demand- Aggregate Supply (AD-AS) model can be used to illustrate the right combination of policies in an economy. Discuss four supply-side measures that policy makers can be implemented to expand the economy and explain why supply-side measures are more desirable than demand-side measures?

Answer 1

Economic theory determines the relationship between the volume of aggregate supply and demand and the level of prices. But the development of market relations has brought in a lot of external factors that affect the indicators of supply and demand. The main non-price factors of the aggregate supply are: The current level of prices for factors of production. It determines the list of costs that the manufacturer will incur until the sale of finished goods and services. The profit of the entity will depend on its ability to organize activities in such a way as to cover costs and get added value. The change in aggregate costs determines the change in the aggregate supply. Resource performance. The higher the performance, the larger the supply. Productivity can be increased through more intensive use of factors of production, or through innovation. Taxation. With the help of fiscal policy, the state can influence business activity. During a downturn, tax rates are lowered, which encourages enterprises to increase production. To keep the economy from overheating, tax rates are being raised. This slows down business activity.