GDP, Aggregate supply/demand

Solution Preview

GDP: GDP is gross domestic product of a company, arrived at by adding consumption, gross investment, government spending and (exports-imports). This method is called expenditure approach.

Examples of components of consumption include household expenditure on food, clothing, etc. Investment is defined as investments made by businesses or households, such as purchase of new machinery, equipment or purchase of new house in case of households.

In layman terms, GDP is the total value of all final goods and services produced in an economy

aggregate supply and demand: Aggregate supply is defined as total supply of goods and services produced by a national economy during a time period whereas aggregate demand is the total demand for final goods and services in the economy at a given time and price level. Some of the factors that affect aggregate demand are income, interest rates, etc. whereas factors affecting aggregate supply include costs, wages or labor costs, availability of credit, etc.

Keynesian Theory: Keynesian theory is the brainchild of John Maynard Keynes. As per this theory, private sector decisions sometimes lead to inefficient macroeconomic outcomes, and thus proposes active policy responses like monetary policy actions by the central bank and fiscal policy actions by the government, to stabilize output over the course of the business cycle. As per Keynes, government policies can be implemented to enhance aggregate demand and thus, reduce unemployment, deflation and boost economic activity. Keynes argued that output and employment cannot reach full employment levels via automatic mechanisms.

Classical theory: The fundamental principle of the classical theory is that the economy is self-regulating. One of the main premises of the classical theory was that supply creates its own demand. An important implication of Say's Law is that inadequate demand or lack of money do not result in recession. ...