Macroeconomics
● Expectations: People’sexpectationsaboutfutureincomesandfrms’expectationsaboutfuture proftsaffectspending(C)andinvestment(I).Optimismincreasesaggregatedemandandshifts itscurvetotheright,whereaspessimismreducesaggregatedemandandshiftsitscurvetothe left. ● Wealth: Wealthrepresentsthevalueofhouseholds'assets.Aswealthaccumulates,purchasing power increases, leading to higher consumption and, consequently, an increase in aggregate demand, shifting its curve to the right. The opposite is true for a decrease in wealth. ● PhysicalCapital: Thestockofphysicalcapitalownedbyfrmsimpactsinvestmentspending(I). Anincreaseinthequantityofcapitalownedbyfrmsindicatesanincreaseininvestmentwhich resultsinhigheraggregatedemandandashiftofitscurvetotheright.Theoppositeistruefora decrease in capital. ● ForeignIncome: Theaggregatedemandofacountryengagedininternationaltradeisaffected by the incomes of foreigners. When foreignincomesrise,thedemandfordomesticgoodsand services,oraggregatedemand,alsoincreases,andviceversa.Forinstance,ifFinlandandChile are trading partners, an increase in Finnishincomescanleadtohigherdemandforgoodsand services produced in Chile. ● Exchange Rates: The exchange rate represents the price of one currency in terms of others. When a country’s currency becomes more competitive relative to others (i.e., its price decreases), the demand for the country’s goods and services increases leading to higher aggregate demand, and vice versa. ● Government Economic Policies: Governments play a signifcant role in impacting aggregate spending. In general, it uses two policies to do that: expansionary fscal policy aims to increase aggregate demand either by decreasing tax rates or by increasing government spending. This stimulates consumption (since lower taxes increase people’s disposable incomes) and investment(sincefrmsmakemoreprofts when they pay lower taxes). Consequently, aggregate demand increases and shiftsto the right. A contractionary fscal policy ,ontheotherhand, aimstoreduceaggregatedemand , mainly in times of inflation (high prices). This is achieved by increasing taxes and/or reducing government spending. Consequently, consumption and investment are ○ Fiscal Policy: This involves the use of taxes and government spending to affect aggregate demand . An
81
© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE|MACROECONOMICS
Made with FlippingBook - Online Brochure Maker