Discuss the extent to which an increase in aggregate demand may affect output, unemployment and inflation. (18 marks)
Aggregate demand is the total demand for goods and services in the economy at a given time and price level. It can be increased by its 5 components which are consumer expenditure, government spending, investment, exports and imports (C + I + G + (x-m)). Output is the quantity of goods or services produced in a given time period, by a firm, industry, or country. Unemployment occurs when people are willing and able to work who don’t have a job and lastly inflation is the general price rise within an economy over a period of time.
If aggregate demand was to increase by for example by government spending on education and training (supply side policy) it would cause a shift to the right in the LRAS curve. This means that the quality and quantity of the workforce and the work being done would improve. This would lead to an increase in the production of goods, which there for would increase in output. However this would depend on where the economy is operating at. By this I mean, if the economy is operating at scarce resources or spare capacity there probably wouldn’t be a great effect on output, and the economy would have to be operating at full capacity for this to take effect. When in a recession, unemployment will increase. This is because as firms close down and don’t have as much revenue, they have to lay off workers. So if the government was to try