Discuss the extent to which an increase in aggregate demand may affect output, unemployment and inflation. (25 marks).
Aggregate demand is the amount at which consumers are willing and able to purchase a product at a given price level. An increase in it will mean that more people will resultantly be willing and able, usually increasing the purchasing of goods. An increase in AD (aggregate demand) can be achieved through monetary policy - the use of interest rates, supply of money and exchanges rates, and also fiscal policy - the use of taxes, government spending and borrowing. The results of altering AD can affect output and employment and also due to multiplier effect (dominos effect) inflation. An increase in AD therefore can have trade offs between unemployment, output and inflation which will have to be controlled.
Method 1 application and analysis
One way AD can be increased is by increasing government spending (fiscal policy), in particular areas of education. This will mean that the workforce will be improved and more efficient through better training. This has been shown to be effective in countries like Germany whose workforce has been invested in largely which has then been ranked one of the most efficient workforces in the world. A more efficient workforce means that companies are able to produce more output per head leading to a general increase in all output. Also, as a worker becomes more efficient they become more employable as employers see the worker as a more important asset to the company. As a result of these however there is likely to be an increase in inflation. This is because more money spent will mean that there will be an increase in the general price level (inflation). This will occur (more spending) as consumption due to more disposable income which will increase which will increase inflationary pressures.
Method 1 evaluation
Increasing G will depend on a low inflation rate and a fairly low output and a high unemployment. This is because governments are unlikely to improve workforce if the output is already high as it will reach a point where it…