The Effect of Consumer and Investor Confidence on Aggregate Demand

Consumer Confidence and its Impact on Aggregate Demand


Consumer confidence is an indicator that shows how optimistic consumers feel about the state of the economy. If a survey shows that there is a wave of consumer pessimism, the aggregate demand will shift to the left because the rate of consumptions and spending in a country shall have declined. In other words, the quantity demanded will be less (Hall, 2018). Aggregate demand can be stabilized by Federal reserves through lowering the rate of interest in a country (Dosi, et al., 2015). Many people will be able to borrow money, and spending rate will increase. Fiscal policy will affect aggregate demand because it monitors the spending and taxation rates. Tracking the spending and taxation rates of the government will influence the employment of people and increase the household income hence an increased spending rate.


Influence of Consumer and Investor Confidence on Aggregate Demand


The consumer and investor confidence influences the aggregate demand of a country in that the higher the optimism of the consumer, the higher the spending rate and if the consumers are pessimistic, the spending rate will be lower hence lowering the aggregate demand and affecting the economy negatively (Hall, 2018). Investors who are optimistic will invest in a country of choice and improve the aggregate demand thus impacting positively on the economy.


The Role of Balanced Budget Rule in Stabilizing the Economy


A country's economy lies in her ability to balance the budget. A government that operates under the strict balanced budget rule will have to break the law and increase the amount of spending to stabilize the economy (Dosi, et al., 2015). Increasing the spending rate will make the recession less severe because the citizens will make use of the money in circulation (Hall, 2018). Consequently, the spending rate in the country will increase and shift the aggregate demand to the right. Specific situation is solved by breaking the economic rules.

Reference


Dosi, G., Fagiolo, G., Napoletano, M., Roventini, A., " Treibich, T. (2015). Fiscal and monetary policies in complex evolving economies. Journal of Economic Dynamics and Control, 52, 166-189.


Hall, M. (2018). How Do Fiscal and Monetary Policies Affect Aggregate Demand?. Investopedia. Retrieved 9 February 2018, from https://www.investopedia.com/ask/answers/040315/how-do-fiscal-and-monetary-policies-affect-aggregate-demand.asp

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