The following diagram shows the impact of an increase in aggregate demand. Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment is the total demand for goods and services at a given price level usually within a year.
Before the increase in AD there was a large Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment gap, this is where the equilibrium point of AD = AS is Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment the point of Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment (Yf). This means that there are Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment resources in the economy and there is Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment in the labour market.
The shift to the left of AD can be caused by such things as an increase in Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment (Y), Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment or consumer spending (C), Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment - which is the buying of capital goods (I), Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment (G) or an increase in Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment (X-M).
With an increase in AD the AD curve will shift to the right to AD2 and both the average price level ( Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment ) and Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment will increase.
This increase in output will cause an increase in Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment and the Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment will be reduced.
If there is a Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment then the government can help to reduce the gap by increasing government Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment , Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment tranfer payments or Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment income tax.
Decreasing income tax will mean consumers will have more Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment and so they are able to Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment more, save more or a combination of both. If they choose to spend more then Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment will increase and AD will shift to the right, Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment the recessionary gap.
An increase in Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment will mean that the government will be purchasing more goods and services and so firms Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment will increase, this causes a shift to he right of the AD curve and so both output and employment will Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment bringing the economy closer to Aggregate demand below consume consumption decreasing disposable income employment full employment Government spending incomes increase increasing inflation investment net exports output production recessionary recessionary gap spending unemployed unemployment .