Economic Growth Essay Example | Topics and Well Written Essays - 1750 words

Economic Growth - Essay Example This will effectively increase interest rates. Along with this, there will be an impact on aggregate output as output will increase with the increase in government spending. As G will increase, this will be impacted in the short run by a decrease in investment, as the supply of money in the banking sector will decrease. This will effectively increase interest rates. Along with this, there will be an impact on aggregate output as output will increase with the increase in government spending. Thus the aggregate demand will go up. This does increase private income and creates a multiplier effect to increase the output. In the money market, the money supply will reduce the banking system; on the other hand, there will be money creation due to increased government spending. A money multiplier effect will take place and the money supply will increase. If the effect of money supply increase by increased government spending is higher than the decrease caused by the reduction in the banking sector then interest rates will fall. On the other hand, if the impact of the increased government spending is higher than the impact of decreased money supply in the banking system then the interest rate will rise. Thus according to the classical model, there will be an immediate increase in price as the â€Å"invisible hand† will be there at work and balance the forces of supply and demand. Interest rates will go up due to the reduction in money supply in the banking sector. On the other hand, there will be a factor pushing the money supply up. Thus a balance will be created between money supply and money demand. Effectively the money that was kept in banks will be circulated to the public, thus creating the money multiplier effect, or creating secondary forms of money. Regarding employment, employment will remain constant in the classical model as the adjustment will be on prices and not on aggregate demand and supply.