Factors Causing Increase in Demand
Various factors responsible for increase in aggregate demand for goods and services are as follows.
1. Increase in Money Supply:
An increase in the money supply leads to an increase in money income. The increase in money income raises the monetary demand for goods and services. The supply of money increases when (a) the government resorts to deficit financing i.e. printing of more currency or (&) the banks expand credit.
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2. Increase In Government Expenditure:
An increase in the government expenditure as a result of the outbreak of war, developmental and welfare activities causes an increase in the aggregate demand for goods and services hi the economy.
3. Increase In Private Expenditure:
An expansion of private expenditure (both consumption and investment) increases the aggregate demand in the economy. During the period of good business expectations, the businessmen start investing more and more funds in new enterprises, thus increasing the demand for factors of production. This results in an increase in factor prices. The increased factor incomes raise the expenditure on consumption goods.
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4. Reduction In Taxation:
Reduction hi taxation can also be an important cause for the generation of excess demand in economy. When the government reduces taxes, it increases the disposable income of the people, which, in turn, raises the demand for goods and services.
5. Increase in Exports:
When the foreign demand for domestically produced goods increases, it raises the earnings of exporting industries. This, in turn, will increase demand for goods and services within the economy.
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6. Increase in Population:
A rapid growth of population raises the level of aggregate demand in the economy because of the increase in consumption, investment, government expenditure and net foreign expenditure. This leads to an inflationary rise in prices due to excessive demand.
7. Paying off Debts:
When the government pays off its old debts to the public, it results in an increase of purchasing power with the public. This will be used to buy more goods and services for consumption purposes, thus increasing the aggregate demand in the economy.
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8. Black Money:
Black money means the money earned through illegal transactions and tax evasion. Such money is generally spent on conspicuous consumption, while raising the aggregate demand and hence the price level.