Aggregate Demand

Dear Economics Enthusiast Roommate,

Aggregate Demand is the term economists use to coin the total amount of goods and services the population is willing to purchase given the circumstances of the market. It is defined by AD = consumer expenditures + investment spending + government spending + (exports - imports).

Any changes in any of these factors could lead to a change in the Aggregate demand, so it is untrue that only a change in Government spending will change the AD. However, since the government plays a big part in the other factors, one could argue that the government spending factor could be one of the more important roles when trying to increase AD the most with the least effort.

A change in government spending would lead to increase more than transfer payments such as social security or taxes due to many reasons. Social Security is given to the elderly, whom do not spend a significant portion of their money on the market compared to the other age groups of people, so increasing the amount of money on each social security deposit would not lead to that much of an increase in spending in market. By lowering taxes, it does encourage spending, but not as much as if someone received a job. By lowering taxes and interest rates, only those whom spend enough for those points to matter change their habits of spending. Lowering a few cents on the tax of a burger does not encourage a great change in spending for the average person.

For the greatest stable increase in real GDP at the current point, I would have the government increase its spending on Education, while lowering the spending on general defense equipment and increase its spending on research for new military technology, and implement a cut in transfer payments such as social security over time, while lowering income taxes to the general population over time.

Spending money in education is never a bad idea since many problems solves itself out if people are educated enough to make the right decision. Also, increase spending in education would also encourage many new jobs as public schools develop more. On the political side, education is a neutral topic in which both liberals and conservatives agree on, which is a good place to start.