Economic growth is highly facilitated by increasing aggregate demand in various ways especially government expenditure increment. Increasing aggregate demand boosts the economy of a given country and the same method is highly recommended in getting the country out of economic recession. A country’s economy can be in recession, depression, boom, or the country could be in an expansionary mode. The economy behaves differently when the country is in any of the three modes.
When a country is in expansionary mode, it implies that expansionary fiscal policies are employed as a way of boosting the country’s economy. Expansionary fiscal policy could be designed as a way of stimulating the economy during business cycle contractions or it could be applied when there are anticipated business cycle contractions. Expansionary fiscal policy works through spending and taxes that can be split further into government purchase, transfer payments, and taxes. Government expenditure increases aggregate demand by increasing money supply hence stimulating the supply side of the economy (Acevedo, 2013). During the recession period, there is a general economic decline or contractions that lead to a decline in the country’s GDP. There is also a decline in the stock market and increased unemployment. Recession period is usually less severe than depression but if it persists, it may end up to an economic depression. Recession results mainly from poor fiscal policies and federal leadership.
When the country is in a depression, there is a prolonged downturn in all economic activities. Economic depression is one of the parts of business cycle and is considered a rare economic experience that comes as an extreme form of economic recession. Economic depression is characterized by a lengthy economic recession with an increased unemployment condition within the economy. There is a prolonged fall in credit and many cases of financial crises (Lütkepohl, 2008). Output usually shrinks when buyers dry up making suppliers cut back their production. In the same economic cases of bankruptcy increase, as well as increase in the country’s sovereign debt defaults, economic depression is controlled through increase-aggregated demand that could be stimulated by increasing money supply in the economy. Aspects of economic depression such as decreased output for a prolonged period, increase in unemployment, financial crises, as well as increasing case of bankruptcy could be used as indicators that the economy is in the business cycle.
Aggregate demand is a key tool of boosting economic growth. Aggregate demand can be increased through various ways. Changes in GDP can be used as a mark of economic changes throughout the business cycle. GDP is taken to be the total sum of all consumption expenditure, investment spending, government spending, and the returns from export. When imports are subtracted from GDP, the resulting figure becomes net GDP (Acevedo, 2013). Increasing aggregate demand is based on the concept of increasing consumer purchasing power. Consumers could be the government, individuals, or organizations within the economy.
Increasing consumer purchasing power could be done as a way of boosting their marginal propensity to consume such as through tax reduction. A decrease in interest rates makes loans cheaper and increases the marginal propensity to save on investment. Increase in foreign-based purchases, as well as increasing government expenditure is parts of the fiscal policies employed to increase aggregate demand. (Gwartney, 2002) The response on the economy due to the application of the factor could be determined using the multiplier in which a change in consumption, saving, investment, or the foreign sector could cause effect on the GDP.
In general, deciding to boost the economy from the supply side or demand side would depend on the economic conditions that prevail. The supply side economy facilitates economic growth by increasing the supply of goods and services. On the other hand, a demand-side economy facilitates growth by boosting aggregate demand (Gwartney, 2002). The demand side economy is the best in stimulating economic growth since supply cannot exceed demand without generating an economic loss. An excess demand creates a basis for motivating producers to produce more hence increasing a country’s GDP and economic growth.
Acevedo, L. (2013). Economic Issues That Increase Aggregate Demand. Retrieved February 24, 2013, from Demand Media: http://smallbusiness.chron.com/economic-issues-increase-aggregate-demand-3907.html
Gwartney, J. D. (2002). Supply-Side Economics. The Concise Encyclopedia of Economics. The Liberty Fund .
Lütkepohl, H. (2008). Impulse response function. The New Palgrave Dictionary of Economics, 2nd. ed.
Siegel, J. J. (2002 ). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 3rd, . New York: McGraw-Hill, 388. ISBN 978-0-07-137048-6.
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