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

Ans) It is the demand that drives supply. If consumers demand anything more then only firms will supply it and not vice versa. So, it is more appropriate to stimulate consumption for economic growth. Increase in consumption will increase aggregate demand and AD curve shifts to the right.

Further, the growth will be more fair if it is complemented by increased supply. As then only a desirable price level can be maintained. Therefore, business sector should be given boost (stimulated) by the government by providing loans at lower rates, easing business norms, providing tax credits etc. Boost to business sector will increase aggregate supply and AS curve will shift to the right.

First graph shows that an increase in consumption has increased both price level and output. But when it is coupled with boost to business sector, output rises further and rise in price level decreases. That is, an equilibrium is maintained if both aggregate demand and supply rises.