Question

explain how consumers impact aggregate demand and supply in the economy (example).

Answer 1

Aggregate demand = AD

Aggregate supply = AS

Gross domestic product = GDP

Y = National income

T = Tax rate

I = Investment spending

r = Rate of interest

G = Government spending

X = Export

M = Import

e = exchange rate

Consumers create huge impact on AD and AS. This is a model of searching equilibrium price and quantity. Consumer spending (C) is an element of GDP, which becomes equal to AD.

AD = GDP = Y = C (Y – T) + I (r) + G + (X – M) (e)

AS = this is the supply condition (technical and physical).

C depends on the tax rate. If an economy is in the expansionary stage (either monetary or fiscal) its money supply increases in the market, which leads to increase consumer spending and AD. Example: Suppose a fiscal policy is taken to reduce the tax rate; it increases C and AD; AD should shift to the right, keeping the price level same. In the contractionary stage the reverse thing would happen.