Aggregate Demand

Aggregate Demand and Supply Models

Aggregate Demand and Supply Models

After deducting taxes and living expenses from wages earned, the amount of income an individual or household has remaining; this amount is the consumer income. Therefore, when consumers maintain a steady income, he or she probably will spend more. Similarly profitable businesses will increase their employment level and also increase current employee’s salaries. Existing effect on economic factors are wealth, population, this refers to how much money a consumer spends and how many individuals have money to spend (Tuttle, 2003, p. 11).

Example; when the economy is high the government will increase taxes causing consumer spending to decrease, and causing some businesses to decrease their workforce and when the economy is low the government will decrease taxes, allowing more revenue so that consumers will purchase more to promote the economy. Certain businesses will hire more employees because the demand for production will increase. Therefore, when applying aggregate demand to this situation lowering taxes would allow the government to control the economy at a moderate pace, increasing taxes allow the government to control the economy at a slower pace (Ananiashvili, & Papava, 2012, p. 6).

Fiscal policy is often discussed in terms of the government budget deficit (government expenditures less government revenue). If aggregate income is too low (definite income is below potential income), the appropriate fiscal policy is expansionary fiscal policy: increase the deficit by decreasing taxes or increasing government spending. Expansionary fiscal policy shifts the AD curve out to the right. If aggregate income is too high (definite income is above potential income), the appropriate fiscal policy is contractionary fiscal policy: decrease the deficit by increasing taxes or decreasing government spending (Colander, 2010, p. 247).

Some additional effects of fiscal policies are that the upper class...