If policymakers do nothing, what will happen to aggregate demand?
Since there's a wave of pessimism sweeping the country, consumers will avoid spending and save their money for cautionary purposes. As a result, the aggregate demand will go down.
What should the Federal Reserve do if it wants to stabilize aggregate demand?
The Federal Reserve should lower interest rates so as to encourage borrowing and put more money in people's hands. Consumers are likely to resume spending if they can access cheaper loans.
If the Federal Reserve does nothing, what do you think might Congress (fiscal policy) do to stabilize aggregate demand?
Congress might increase spending in infrastructure and education as a way to boost employment. The more people are employed, the more likely aggregate demand will increase.
Why do you think consumer and investor confidence affect AD and hence the economy?
Consumer and investor confidence affects aggregate demand because they are the main players in an economy. The investor has to have faith in the market and pump money into it in order to create employment and boost overall consumption power. The consumer has to want the goods created by the producer so that money can circulate.
One of the most debated areas in economics is balancing the budget. The major contention is on the timing of the policy. If the government were to operate under a strict balanced-budget rule, what do you think it would have to do in a recession?
According to the balanced-budget rule, a country cannot spend more than it earns. In the case of a recession, the government can use quantitative easing to print more money and spend it on infrastructure projects to boost aggregate demand.
Should it follow the strict rule? Would that make the recession more or less severe? Why?
No, it shouldn't follow the strict rule, since it may worsen the recession. The recession would be less severe if the government borrowed instead of printing more money, since quantitative easing can lead to inflation.
https://www.ft.com/content/8e3ec518-68cf-11e4-9eeb-00144feabdc0
https://www.investopedia.com/ask/answers/040315/how-do-fiscal-and-monetary-policies-affect-aggregate-demand.asp
https://www.investopedia.com/terms/b/balanced-budget.asp
There are many questions to untangle here, so it is perhaps best to focus on a few of them, since the first few are all very closely related. First, consumer pessimism should lead to a decline in aggregate demand, since people are less willing to make major purchases and investments when they fear the economy (and thus their own economic prospects) is not moving in a positive direction. If the Federal Reserve wanted to increase aggregate demand, it could do so by lowering interest rates, which makes it cheaper for banks, and therefore consumers, to borrow money. This would be manipulating the economy through monetary policy. If Congress chose to act to try to raise aggregate demand, it would do so through fiscal policy. How to accomplish this is a highly ideologically-charged question, but the available options would include lowering taxes or increasing government spending. These actions, in very different ways, result in more money in the economy, providing more for people to spend or invest. The key here, because we are addressing aggregate demand, is that these actions would likely boost demand because they would create more confidence that the economy was going to turn around. In the case of a recession, the government would have to be careful about either of these policies, which would both be very difficult (basically impossible) if it operated under a balanced budget rule. Any increases in spending to boost the economy would have to be offset by spending cuts in areas less connected to the overall economy. For this reason, following a strict balanced budget rule would make directly attacking a recession through fiscal policy very tricky.
https://www.investopedia.com/ask/answers/081915/how-can-federal-reserve-increase-aggregate-demand.asp
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