Economic Expansion Explanation

Economic Expansion Explanation

Introduction

There are several economic models that have developed over time in order to comprehend the economic changes that occur. The most popular school of thought in this regard is two. These are the Keynesian economists and the Monetarists economist. Keynesian economist believes that government intervention and economic policies are the main driving force of the economy, whereas Monetarist theorists believe that the main determinants are money supply and interest rates.

Keynesian Models

Keynesian economist believes that the driving force behind the economy is the government intervention and the government expenditures (Mankiw N. G & Romer D., 1991). In this regard, there is an economic model known as aggregate expenditure method that measures the national income and the cause of recessions can be explained through this model.

Aggregate Expenditure model

Aggregate expenditure is the current value of output in the economy. It takes into account the sum of all the activities in the economy, which is basically the Gross Domestic Product (GDP). The Aggregate Expenditure is represented by the following equation:

AE= C+G+I+(X-N)

The comprehension of the components of this model is essential to understand the reason for recessions as they play a significant role in its occurrence. 'C' is referred to the aggregate consumption by the consumers in the economy and hence, it is a leakage from the national output. 'I' is referred to the investment in the economy and it is an injection into the economy. 'G' is the government expenditure in the form of taxes and subsidies. 'X' is referred to the difference between exports and imports.

Reason for recession and growth

The government in order to increase national revenues can increase taxes. This would affect the consumers in the economy, and it may lead to lower consumption and reduce 'C' component. This would affect the investment in the economy as low ...