Difference Between Aggregate Demand And The Price Level

Question (3) A) What is Aggregate Demand? Aggregate demand is the total amount that all consumers, businesses, government agencies, and foreigners spend on final goods and services. Aggregate demand is represented by the aggregate-demand curve, and it describes the relationship between price levels and the quantity of output that firms are willing to provide. Aggregate demand is not a fixed number because it depends on the price level. The relationship between aggregate demand and the price level normally is a negative relationship, which creates a downward-sloping aggregate demand curve. B) Develop a model showing the importance and effects of Aggregate Demand on the overall economy. The model is aggregate supply/ aggregate demand†¦show more content†¦It stimulates the aggregate demand and thereby increases overall economic activities and growth. Fiscal policy, as it will be explained below, could affect the whole economy through affecting the aggregate demand. For example, increasing government spending lead to increase the aggregate demand and thereby boost the entire economy (more details about this example and how the expansionary and contractionary fiscal policy could affect aggregate demand and thereby affect the overall economy are in the answers of sections d and e) C) What is Fiscal Policy? What are the goals of Fiscal Policy? What are the tools of Fiscal Policy? Fiscal policy is the government’s plan for spending and taxation (which in the United States is set by the Federal Reserve). Fiscal policy is helping to steer aggregate demand in the desired direction of the economy because the increasing or decreasing in spending and taxes levels influences the economy. Thus, the main goals of this policy are to help the government to manage inflation, employment and the flow of money through the economic system. There are two main tools of fiscal policy, taxes and spending. Taxes affect the economy by determining the total money that the government has to spend and how much money each person has to spend. Secondly, government spending as a tool for fiscal policy can be used to drive government money to certain sectors that need an economic boost. These sectors who receives those dollars