Macroeconomics and Policy

Aggregate demand refers to the sum total of expenditure that the people plan to incur on the purchase of goods and services produced in an economy corresponding to their different levels of income. It can be increased when the credit creation capacity of the commercial banks gets increased. By increasing bank rate, selling government securities by RBI and increasing cash reserve ratio decrease the aggregate demand in an economy.

Aggregate demand is the total consumption of goods and services as it is not practically possible to count all the goods and services consumed and hence, the total expenditure undertaken by each household for consumption, private investment, expenditure by government on consumption and investments and net exports. Hence, deficient demand can be because of fall in household consumption, decrease in private investment, decrease in government expenditure. 

Marginal efficiency of investment (MEI) refers to the expected rate of return from the allocation of a proportion of income or capital invested in the business. There is a inverse relation between the rate of interest and investment. If the rate of interest is high then people will take less loan from the bank and they will have less money to invest in whereas if rate of interest is low then people will take more loan from the bank to invest in the business. 

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.

The determinants of aggregate demand is expressed as: 

Aggregate demand= C+I+G+ (X-M) where

C= Consumption expenditure

I= Investment expenditure

G= Government expenditure

(X-M)= Net export.

Public debt is often used for infrastructure and development, which impacts the production of wealth, whereas private debt is typically for consumption or specific business ventures.

National debt increases when the government spends more than it earns, which is facilitated by long-term government borrowings.

Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods .Demand-pull inflation is the  most  common cause of rising prices. It occurs when consumer demand for goods and services increases so much that it outstrips supply. Producers can't make enough to meet demand. They may not have time to build the manufacturing needed to boost supply.

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.

The Ad curve in income determination analysis represents a two sector economy which only includes the expenditure made by the consumer sector and the producer sector.

Therefore, aggregate demand = consumption + investment = C + I.

When aggregate supply is more than aggregate demand or when investment is less than savings, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the production output till Aggregate demand becomes equal to Aggregate supply. Therefore, level of national income reduces to the level of aggregate demand in the economy.

When aggregate demand is more than aggregate supply or when investment is more than saving in the economy , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers will expand the output. Therefore, as a result of more output in the economy, the income will increase. 

When the aggregate spending is not sufficient to produce an adequate level of output which requires full employment of available resources then it means aggregate demand is less than aggregate supply, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output which reduces the employment in the economy. 

When the aggregate spending is excessive then it leads to output which has full employment of available resources then it means aggregate demand is more than aggregate supply, then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output but due to full employment of the available resources the output remains the same which leads to inflation in the economy.

The point at which aggregate demand (AD)  is equals aggregate supply (AS) is the point of effective demand  because at this level there is no tendency for income and output to change and the market is entirely clear.

True.