Economics-For Managers

An economy can reach equilibrium without government intervention, with government intervention, and with trade. Consumption is important to determine the aggregate demand in an economy. According to the Engel's Law, the amount spent on food and other necessities falls as the income rises. A country's consumption expenditures rise as incomes rise. The Keynesian theory explains how consumption and investment can help the economy reach equilibrium. Savings and investment can also help the economy reach an equilibrium. An increase in savings leads to a decrease in national product whereas an increase in investment demand leads to an increase in national product. When savings equal investments, the economy reaches its equilibrium point. Keynes believed that government intervention can reduce the level of unemployment. When the economy has high unemployment levels, the government can take fiscal measures to reduce unemployment. Government can increase aggregate demand during recessions by increasing its spending or decreasing the tax rate. An increase in aggregate demand will have a multiplier effect on the economy.