Aggregate Demand and Supply Paper

Topics: Monetary policy, Inflation, Keynesian economics Pages: 5 (1959 words) Published: June 3, 2013
Aggregate Demand and Supply Models Economic Critique
Ken Drake,
ECO 372 Macroeconomics
September 10, 2012
Jason Foster

Aggregate Demand and Supply Models Economic Critique
In the United States the economy is currently in a recession, although signs are indicating that the economy is slowly recovering. In an effort to analyze the Unites States economy the unemployment rate, expectations, consumer income, and interest rates have been evaluated. The results of these evaluations are included in this report. Unemployment in the United States fell to 8.1% from 8.3% in July. U.S. employers are said to have added 96,000 jobs in July (KSL News, Sept) . According to reports from the department of workforce services the decrease in the unemployment rate was not because of new jobs but rather from people not looking for work. In order for a person to be counted as part of the unemployment rate they must actively be seeking work. The unemployment rate does not give an accurate rate of all people out of work. Interest rates in the United States vary depending on what is being assessed. Home mortgage rates are as low as 2.26% in some areas. The Federal Reserve stated in August that they were going to further steps to stimulate growth if the job market does not show sustained improvement (U.S. Federal Reserves leaves monetary policy unchanged, August). Interest rates are defined as "the prices that are charged or paid for the use of financial asset." Many people refer to credit as "other people's money" this usually involves borrowing money from the bank or from family members for a reasonable set interest rate. The interest can be paid along with the monthly payment or be paid al at once at the beginning or end of the loan. The Federal Reserve sets the national interest rate and thereby guides the country through inflation and then recession, adjusting the rate to try and control either phase. This fluctuation also controls how people buy and build. Large and small companies watch this interest rate carefully. It determines how much they will pay on a loan to purchase inventory, new vehicles, expand their business, and pay for expenses. Individual consumers are also affected by the interest rate when looking at buying a new home or car. Consumer income fell in July because of cash-short governments that cut 39,000 jobs in June and July. Manufacturers cut the most jobs in two years and number of people in the work force dropped to its lowest level in 31 years. Based on this report consumer income is down which means that consumers are cutting back on purchases and only spending money on their basic needs. There is an obvious contradiction between the job rate and unemployment. One report states that jobs are being added, however another report states that there are reported job losses. No matter the point of view that is taken, the fact remains that job growth is not where it needs to be in order for consumer's income levels to rise and for confidence to built. When consumer confidence is low, and the income level is low money is not put back into the market. In business, expectation involves anticipating what buyers will do in a given period of time. Historically based expectations are explained as expectations about the future that are based on past events. In a perfect world, the price for a product is the same today as it was yesterday, however this is not the way it is today. The problem with expectation and dealing with people is that it is difficult to stay ahead of the buying public's changing moods. The new classical economists formed a group to study the problem, and were joined by Nobel Prize winners Franco Modigliani and Herbert Simon, and John Muth. This group came up with a very simple model that counted on people to be smart enough to understand the changes in price and that the market would always be at equilibrium (Franco Modigliani, Nove). Other economists found the model too simple...

References: Aggregate demand and aggregate supply. (2012). Aggregate Demand and Aggregate Supply. Retrieved from http://highered.mcgraw-hill.com/sites/dl/free/0070969531/817998/McConnell_Macro12ce_Ch10.pdf
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.
Franco Modigliani. (November 2007). New World Encyclopedia. Retrieved from http://www.newworldencyclopedia.org/entry/Franco_Modigliani
Investopedia. (2012). World Financial Watch.com. Retrieved from http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/aggregate-supply-demand.asp#axzz25ptSCggd
KSL News. (Sept. 7, 2012). US economy adds 96K jobs, rate falls to 8.1%. Retrieved from http://www.ksl.com/index.php?sid=21719317&nid=481
U.S. Federal Reserves leaves monetary policy unchanged. (August 2012). Trading economics. Retrieved from http://www.tradingeconomics.com/united-states/interest-rate
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