Using Aggregate Demand And Aggregate Supply Analysis Examine The Different Effects On The Uk Economy

1225 words - 5 pages

a) Decisions by firms based in the UK to relocate abroadAggregate demand is defined as the total amount of demand/expenditures in the economy at any given price level. It is measured asAD = C + I + G + (X - M)The letters abbreviate the four major components of aggregate demand. Consumption (C ) is the spending by households on goods and services. Investment ( I ) is the spending by firms on investment goods. Government spending (G ) includes current spending in terms of wages and salaries, and investment in goods such as new roads and new schools. Exports minus imports (X - M ) shows the difference between what we sell and what we buy from abroad.Aggregate supply is defined as the total amount of production of goods and services in an economy.If the decision by UK based firms to move abroad were acted upon, this would in theory lead to a decrease in aggregate demand. The AD curve would shift left to signify this. This is because there are now fewer firms producing goods and services for the UK and so there is less choice in the market. As consumers now have less to buy, consumer spending, which is a component of aggregate demand, falls. Furthermore, investment is affected. With the relocation there are less national firms to invest in, and therefore investment decreases. Another point would be that these firms may have perhaps exported their goods and services abroad to foreign countries. After they move UK exports could see a decrease, meaning that, according to the aggregate demand equation, the difference between exports and imports will be smaller. This factor too would conclude in a decrease in AD.To illustrate the affect the transfer of UK based firms would have on aggregate demand, here is a diagram:Decisions by firms to relocate abroad would in addition have an impact upon the long-run aggregate supply of the economy. Primarily, an increase in unemployment would result as the firms no longer produce their goods/services in the UK. This leads to a fall in the productive potential of the UK, signified by a leftward shift in the long run aggregate supply curve:b) Increases in UK interest rates during 1999Manipulating interest rates is an example of fiscal policy, whereby the government endeavour to influence the rate of economic growth for various purposes. Increasing interest rates in the short-term would lead to a fall in disposable income for those who have borrowed money, such as mortgage holders, because the amount they pay back per month increases. Furthermore, if there is an increase in interest rates people are more inclined to save and keep a fraction of their income in a bank/building society; although it is worth pointing out there are more borrowers in our society than savers. As disposable income is reduced, consumer spending decreases. The UK economy therefore experiences a decrease in aggregate demand. It may also see a decrease in inflation as retailers reduce the price of their goods/services to make them more obtainable to...

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