Keynesian Aggregate Expenditure Model Essay Example | Topics and Well Written Essays - 250 words

Keynesian Aggregate Expenditure Model - Essay Example Some aspects of the aggregate demand tend to be stable and alter at a slow pace at any time (Pass & Lowes 8). Other aspects of aggregate demand like Investment expenditure tend to be volatile and change at a short notice, thereby influencing the level of economic activity in a country (Pass & Lowes 8). It is the level of interaction of the aggregate demand with aggregate supply in an economy that determines the equilibrium level of national income (Pass & Lowes 8). A government can resort to fiscal and monetary measures to regulate the aggregate demand in a country to tackle problems like unemployment and inflation. These fiscal and monetary measures may include making investments in large public projects, increasing government spending and purchases, lowering the tax rates, extending loans and lowering interest rates. Increased government spending gives way to the multiplier effect as per which a little increase in the rate of spending results in a more than proportionate rise in th e national income (Pass & Lowes 366). The logic behind the multiplier effect is that though the increase in the rate of spending is small, the multiple numbers of transactions owing to that increase stimulate the economy (Pass & Lowes 366).