Question

What is more appropriate to help stimulate economic growth; consumption or investment demand? What sector do you think our economy should look at stimulating, consumers or businesses? Explain your reasoning using the concepts of aggregate demand and supply.

Answer 1

It is the demand that leads to supply of the goods & services and it is not vice versa. Thus, it will be more appropriate for the government agencies to stimulate consumption demand. With the increase in consumption demand, business houses will go ahead with the investment and supply will increase to cater the demand. It will put the economy on the path of growth and development. Here, government agencies can simultaneously help firms by offering capital at lower interest rate and or relaxation in tax payments. It will further boost the economy.

The focus should be on a balanced approach. Encouraging consumers to consume more will increase the demand. It will be complimented by increased supply that is further boosted by business friendly economic policies. Thus, an equilibrium between aggregate demand and supply in an economy is achieved.