Question

What would be the consequences of the Brexit on the aggregate demand of the UK? Discuss your answers.

Answer 1

Brexit leads to recession in UK. Brexit negatively affect the aggregate demand in UK and this cause economic slowdown also. There is loss of confidence among the foreign investors negatively affects the investment in UK and this create uncertainty among the consumers and producers. They are willing to afford higher cost for accessing the single market. This huge fall in investment leads to reduction in aggregate demand. The uncertainty created over Brexit leads to the increasing level of saving of the consumer and this reduce the spending and consumption. The devaluation of pound increases the price level and retards the consumer’s consumption level. The fall in house price cause negative wealth effect.
The Brexit also make drastic changes in the financial market also. Banks reduce their lending rate and this hardens the credit making in the economy. This reduces the investment of firms also. The withdrawal of UK as a single market discourages the firm’s investment in the export capacity. This affects the export and import level of the country, which claimed as one of the important source of income generation. There is a high rate of taxes imposed upon the UK economy. This reduces the disposable income among the consumers and reduces their consumption spending. The cut in migration negatively affect the economic growth and public finance.