Aggregate Demand and Supply Models

Topics: Keynesian economics, Inflation, Monetary policy Pages: 5 (1618 words) Published: July 12, 2013
Part One - Analysis and Recommendations
When examining unemployment and supply and demand it is imperative to examine the affects one has on the other and vice versa. If no new jobs are created or layoffs occur, there are no jobs to supply the needs. As the availability of money lessens a smaller amount is available for the purchase of goods, therefore fewer goods are sold. As the demand lessens sales forecasts also become smaller, these forecasts project fewer orders placed to the manufacturers. Merchants do not want to hold onto a disproportionate amount of inventory, which can be extremely expensive, both from the standpoint of cash/credit expenditure and for the storage fees. The smaller the orders are for manufactured products will result in a smaller customer supply level (United States Unemployment Rate, 2013). It is essential to amplify government funding to generate new jobs in order for the unemployment rate to be reduced. From a Keynesian viewpoint increasing government, spending is a multifaceted benefit for everyone, and this will control the aggregate level. From a Classical perspective, it is best to let the economy naturally adjust, to incorporate the unemployment ratio. Consequently, for that reason, increased spending would not be fitting in this economic model. Expectations

In the first three months of 2013, the GDP in the United States has grown at a 2.5% annual rate. Although the GDP has risen from the last quarter of 2012, 2.5 is still almost a full point under the expectations of economists for the year. Although the economy is in a more stable point than in the 2008 collapse it has become apparent the United States economy has been stuck for quite some time now. According to Neil Irwin (2013 Washington Post) “the biggest culprit in the weak report was the government sector, which fell at a 4.1 percent rate, after a 7 percent pace of decline in the fourth quarter.” Unfortunately, this year the private sector of business has proved of no expansion and no signs point to change.

As for the expectations for the rest of the 2013 year, its economist’s jobs to identify trends in the market and make assumptions of change in the economy based on those findings. Unfortunately, there seems to be little to any trends that look promising enough to quicken the recovery of the 2008 collapse. As it stands currently, the United States economy will slowly continue to grow, but not quickly. * Consumer Income

According to Sivy (2013), “Personal income fell 3.6 percent in January, the biggest decline in 20 years” (p. 1). If one takes into account taxes and inflation, the accurate disposable income is closer to 4%. Many economists believe that even though there is a slow recovery from the recession the standard of living for many American’s has declined. It has become difficult for the middle-class income to keep up with rising taxes and unemployment. There does not seem to be any movement toward restoring income for middle-class households, which affects the GDP in a negative manner. The relationship to the aggregate supply and demand curve is that the consumers will only consume the number of goods and services their budget allows. When a consumer has a lower level of income, he or she is less likely to purchase high quantities of products and services, causing a negative effect on the aggregate supply and demand. Less wealth leads to less consumption, bring down the demand for goods, and causing a shift in output (to the left). Interest Rates

The Federal Reserve Board (also known as the Fed”) controls interest rates. “When the Fed raises or lowers short term interest rates, banks can raise or lower the interest rates they charge borrowers, including the prime rate” (Northrop Grumman, 2013). In today’s current economy, there is a rise in interest rates. One may ask, what does this mean for the consumers in our economy as well as businesses. A number of things...

References: Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.
Ehling, J. (2013). Interest Rates for Home Mortgages Starting to Climb Back up. Retrieved from
Joint Economic Committee. (2011). Spend Less, Owe Less, Grow the Economy. Retrieved from
Northrop Grumman. (2013). How Do Interest Rates Affect the Economy? Retrieved from
Patil, S.B. (2012). Classical Economics Vs. Keynesian Economics. Retrieved from
Sivy, M. (2013, March). Why Many Americans Feel Like They 're Getting Poorer. Times,
Business & Money, 15(1).
United States Unemployment Rate. (2013, May). United States Unemployment Rate
Data/ Chart/ Forecast/ News. Retrieved from
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