Furthermore, if now consumption is also increased by $5 and investment is held constant at $5 added to it in AD2 the graph shift further to the right to be positioned at AD3. Therefore, increases in consumption and investment increases the overall aggregate demand in the economy. It is imperative to note here that as the aggregate demand curve increases from AD1 to AD2 the price level rises from P1 to P2 and as it shifts from AD2 to AD3 the price level further rises from P2 to P3. Therefore, an increase in aggregate demand also brings about a corresponding increase in price levels, which signals that following these measures the Fed will also instill inflationary trends and price levels of goods and services in the economy will increase. This is highlighted in the article as well that critics point out the inflation these measures would bring about. However, the chairman of Fed rules out their criticism by stating that fears of deflation is looming on the US economy.
Therefore, it can be seen that the Federal Reserve is following the expenditure approach towards stimulating GDP. Wherein, GDP is defined as a sum of government spending (G), investment (I), consumption (C) and net export (exports- imports) (Xn). GDP = I+C+G+ Xn. Therefore, an increase in the investment and consumption would also bring about a corresponding increase in GDP since the GDP is directly proportional to investment and consumption factors in an economy. This is illustrated in Graph 5, wherein, the original level of GDP has consumption level C and investment level I. However, when the consumption and investment levels are increased to Ca and Ia respectively the graph shifts upwards bringing about a corresponding increase in GDP with it. This is exactly what Fed hopes to accomplish through its aggressive purchases and hopes to pull out the economy out of recession by the end of this year.
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