The Keynesian theory enumerated three principle tenets in which it would affect aggregate demand thus achieving equilibrium in the economy and these include private and public economic decisions have great impact on aggregate demands, prices respond slowly to changes in supply and demand and lastly alterations in aggregate demand either anticipated or unanticipated have effect on real output and employment
Demand Side Policies Demand side policies aim to boost aggregate demand in the country. Demand side policies play a very important role in increasing the rate of the economic growth when the country is experiencing a recession period. Below are some examples of the demand side policies. 3.1.1. Monetary Policy Monetary Policies are the decisions guided by the monetary authority to manage the money supply or to change the interest rate to influence the rate of economic growth.
This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and
1.Definition of the macroeconomic variable a) Economic Growth A rise in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be considered in nominal terms, which contain inflation, or in real terms, which are adjusted for inflation. The increase of an economy is thought of not only as an increase in productive capacity but also as a development in the quality of life to the people of that economy.Increase in the capital stock, advances in technology, and improvement in the quality and level of literacy are considered to be the principalcauses of economic growth. Two main factors of Economic growth are an increase in aggregate demand and aggregate supply. b) Inflation
The multiplier effect refers to the fact that when the government increases its spendings, firms and households receive that spending and re-spend that income (government spending is received as income). This leads to multiple routes of spending, so overall the increase in net aggregate demand is greater than the initial increase in government spending. Therefore, a small increase in government spending can possibly be enough to stimulate the economy, because the net increase in AD will be greater. Secondly, another advantages is effects on the supply-side. In this case, the spending is mainly on improving infrastructure and livelihoods, meaning there are supply-side effects, which increases the short run aggregate supply.
By altering the cost, federal funds rate indirectly affects the spending and investment by households and businesses, which on their turn, impact output and inflation in the economy. The dynamic Three Equation Macro Model designed by Charles I. Jones allows us to trace the behavior of the Fed’s monetary policy and other economic variables over time when the economy is exposed to different kinds of shocks. The model incorporates IS curve along with the Phillips curve and the Taylor Rule, assuming the adaptive inflation
There are two components of well being- material and qualitative well being. Material aspect of it can be measured like the shift in the growth model of measuring GDP to measuring income and consumption. The distribution of wealth and income and the inequalities and disparities that exist need to be filled. Piketty believed in observation of social income and distribution of income. The other aspect is the qualitative part that looks at the non-market dimensions of development that is health, education, the pattern of public expenditure, measurement of personal work and the quality of work produced.
It analyse the national goals of the economy, such as maintaining full employment, stabilizing the economy or pursuing the economic growth. A market, in an economic view refers to which buyers and sellers negotiate the exchange of specific goods. Markets can be distinguished into product
DISADVANTAGES Long term financial development puts an awful effect on the inhabitants of any nation. Long term economic developments may be identified with expansion, as inflations may increase. Inflations usually increase the cost of products on sale, and as the costs are higher, it will be an issue to the nationality in question to be able to buy their needs There is a limited amount of time involved in the growth of an economy as it involves an increase in GDP. The hypothesis and practice are both diverse. The hypothesis is the thing that economists are able to figure out for themselves; however, to be able to use the hypothesis in reality is the main task.