Increase in Aggregate Demand and its Outcome

Increase in aggregate demand means that there is a rise in the total demand for goods and services in an economy. It can happen due to various factors such as increase in government spending, rise in consumer confidence, decrease in taxes, etc. The most probable outcome of an increase in aggregate demand is expansion of economic activity.

Expansion of Economic Activity

Expansion of economic activity refers to an increase in the production and consumption of goods and services in an economy. When aggregate demand increases, producers are motivated to produce more goods and services to meet the rising demand. This leads to an increase in the production of goods and services, which in turn leads to an increase in employment opportunities. As more people get employed, their income also increases, leading to an increase in consumer spending. This creates a positive feedback loop where an increase in aggregate demand leads to an increase in economic activity.

Other Possible Outcomes

While expansion of economic activity is the most probable outcome of an increase in aggregate demand, there are other possible outcomes as well. These include:

- Inflation: If the increase in aggregate demand is not matched by an increase in the supply of goods and services, then prices of goods and services may rise, leading to inflation.
- Trade deficit: If the increase in aggregate demand leads to an increase in imports, then it may lead to a trade deficit.
- Unsustainable growth: If the increase in aggregate demand is due to unsustainable factors such as a credit bubble, then it may lead to a boom-bust cycle.

Conclusion

In conclusion, an increase in aggregate demand is likely to lead to an expansion of economic activity. However, the outcome may depend on various factors such as the supply of goods and services, inflation, trade, and sustainability.

In the short term, economic growth is caused by an increase in aggregate demand (AD). If there is spare capacity in the economy, then an increase in AD will cause a higher level of real GDP.