Aggregate Demand Analysis

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Economic Concept
The first economic concepts that exhibited in the article is GST will affect the aggregate demand and aggregate supply (AD-AS) model. From the articles, we know that GST taxes are applied only on the consumption component while the savings and investment are not taxed. This will encourage consumers to save more while the business to invest more in productive activities. Consumer spending is a major component of aggregate demand(AD) and economic growth(Y). If consumer increase in saving, it will reduce the rate of economic growth. Diagram A
When the consumption in the market decreases, the aggregate demand curve will shift to left, from AD1 to AD2. It will form a short run equilibrium at point B. At point B, the country’s …show more content…

This may shift the long run average supply curve to the right, from LRAS1 to LRAS2 (Refer to Diagram B). Moreover, the increase in investment will also cause a rise in output and profit, which indirectly increase the competitiveness of a business. The high profit of a business will increase their workers’ pays to encourage the high level of work contributions. This allow people to gain more income. Thus, people are more willing to spend their incomes on more goods and services. With strong multiplier effect, aggregate demand may have a bigger increase and aggregate demand curve may shift to right in the long term (Pettinger, T., n.d.). (Refer to Diagram C).
The Royal Malaysian Customs Department has divided the taxable supplies into 4 groups, which are standard-rated supplies, zero-rated supplies, exempt supplies and out of scope supplies. Although zero-rated supplies subjected to zero percent of GST charging but the demand of the good and services will not increase or decrease correspondingly with a fall or rise in its price. This is because most of the zero-rated supplies such as fresh fruit, rice, salt and vegetables are inelastic demand (Good and Services Tax (Relief), …show more content…

Based on Diagram F above, it shows that the aggregate supply curve shifting rightward from AS1 to AS2, which causes the price level to increase from P1 to P2 and the RGDP to decrease from Y1 to Y2. The change of movement from the original equilibrium to the new equilibrium brings lots of effects to the economy. For example, the decrease in GDP causes a recession of economy to occur. This would also lead to the high unemployment rate which cause by the inflationary higher price level as the economy is now further away from natural rate of output. Besides that, the introduction of GST in Malaysia will enhance global competitiveness of exported goods and services. This is due to no GST is imposed on exported goods and services (Ng, Tuam, & Dr Aik, 2014). Subsequently, the price of the export good will become cheaper. So as the result, GST implementation that enhance global competitiveness of exported goods and services will shift the aggregate demand (AD) curve to

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