Question

1. What are the components Aggregate Demand? Which component is most important? Why? Why does it slope down?
2. What are the causes of inflation? Use the aggregate demand and aggregate supply graph to illustrate the two main causes of inflation. Which do you think is more severe?

I really need help on these questions about Economics.

Answer 1

ANS

There are four components of aggregate demand, consumption is the first componenet of aggregate demand and it has two parts private consumption expenditure which is the consumption of households and companies and government final consumption expenditure which is the exppenditure of government. The second component is investment and this has two parts that are autonomous investment which is the constant investment for roads , bridges dams etc and induces investment which is used to attain equilibrium and is not constant. The third component is government spending ,it is the amount that government spends in the the aquisitiion of private sector enterprisesor in the acquisition of assets like education ,healthcare etc. The fourth part is net exports, which is the difference between imports and exports.

The two main causes of inflation are increased in wages and decrease in tax rates, these factors causes the increase in demand due to increase in money supply in the economy and due to which the purchasing power of the consumer increases which increases the demand of goods and to attain the equilibrium producer decides to increase the price of the goods and services and this sudden increase of price of goods and services results in inflation. In the two factors decrease in taxes cause more increase in inflation and is a major reason to result in inflation because in long run the change in tax rates tend to increase the rate of inflation and resulting in increase in price of goods and services.

In the image the AD is increased to AD' due to increased in money supply which causes the inflationary gap between the two curves and due to this increase in demand the price increases to new price and due to which inflation exists.