The aggregate demand and the aggregate supply model allows us to examine how a variety of events can affect the economy.
In your own words, discuss which of the four sources identified with aggregate demand has caused a change in the aggregate demand for a product or service you or your employer use. Share the effect that source has had on how you or your employer contribute to the measurement of aggregate demand.
Sample Solution
H
ere is an example of how a change in one of the four sources of aggregate demand can affect the aggregate demand for a product or service:
Source of aggregate demand: Consumer spending
Change in the source: A decrease in consumer confidence
Effect on aggregate demand: A decrease in the demand for goods and services
Effect on how I or my employer contribute to the measurement of aggregate demand: A decrease in our spending on goods and services will lead to a decrease in the aggregate demand for goods and services
Here is an explanation of how this works:
- Consumer spending: Consumer spending is the largest component of aggregate demand. When consumer confidence decreases, consumers are less likely to spend money, which leads to a decrease in the demand for goods and services.
- Decrease in the demand for goods and services: A decrease in the demand for goods and services leads to a decrease in the aggregate demand for goods and services. This is because the aggregate demand for goods and services is the sum of the demand for all goods and services in the economy.
- Decrease in our spending on goods and services: If my employer or I decrease our spending on goods and services, this will lead to a decrease in the aggregate demand for goods and services. This is because our spending is part of the total demand for goods and services in the economy.
In conclusion, a decrease in consumer confidence can lead to a decrease in the aggregate demand for goods and services. This can have a negative impact on the economy, as it can lead to a decrease in economic growth.
Here are some other examples of how changes in the four sources of aggregate demand can affect the aggregate demand for a product or service:
- Investment spending: An increase in investment spending can lead to an increase in the aggregate demand for goods and services.
- Government spending: An increase in government spending can also lead to an increase in the aggregate demand for goods and services.
- Exports: An increase in exports can lead to an increase in the aggregate demand for goods and services.
- Imports: A decrease in imports can also lead to an increase in the aggregate demand for goods and services.
The aggregate demand and aggregate supply model is a useful tool for understanding how changes in these four sources can affect the economy. By understanding how these sources affect aggregate demand, we can better understand how changes in the economy can affect our own spending and the spending of others.