Since the great depression, our understanding of what makes an economy grow or contract changed a bit. New macroeconomics concepts became popular, sometimes even taking place of classic ones. Using those concepts, Christopher Sabatini wrote the article “The Rot at the Heart of the Brazilian Economy”, published by the Foreign Policy (FP) website on the last February 10th. In the article, Sabatini tries to explain what went wrong with the once very prosperous Brazilian economy, which in the past years has been diving into a recession that is so deep that many economists already call it a depression. The purpose of this paper is to explain how the Keynesian concepts of aggregate demand and fiscal policy that I learned in the macroeconomics classes …show more content…
However, let us first show how the aggregate supply relates to aggregate demand and how those two will determine, consecutively, price level and real gross domestic product (RGDP). Observe graph one in the appendix. The vertical long run aggregate supply (LRAS) curve represents the desired equilibrium in an economy; John Maynard Keynes during the Great Depression of 1929 proposed a short run aggregate supply (SRAS) curve, which represents what is possible in the short term. I am going to focus on the AD; there are four components of the aggregate demand curve, which we can call AE for aggregate expenditure (see graph two in appendix). Those components are household consumption (C), businesses investments (I), government expenditure (G), and the net foreign sector (X). All the four components are autonomous, however, they sum up to the aggregate expenditure function that, in the Keynesian model, will determine the RGDP of a country. Therefore, the aggregate demand is crucial for the economic growth, and any shift of that function will affect significantly the overall …show more content…
It also usually means that government is trying to increase aggregate demand by increasing the G – the first tool in the fiscal policy “tool box”. To make that possible, the government will need extra money to spend, and, just like whenever you and me decide to spend money that we do not have, some loans come to game. The way that the federal administration borrows money is by selling bonds. Once the intention is to sell many bonds in order to achieve the desired loan value, the government will increase the yield of the bond, thus more people will be interested in buying them. Goal achieved: more checks will enter the government’s account, and the incentive package can start to