ECO372 Aggregate Demand And Supply Mode

Topics: Monetary policy, Keynesian economics, Inflation Pages: 6 (1227 words) Published: January 19, 2015


Aggregate Supply and Demand Models
ECO/372
November 24, 2014
Aggregate Supply and Demand Models

Current state of Interest Rates and their effect on the U.S. economy

Since the financial collapse of 2007 the United States Federal Reserve has maintained a system of policy accommodation consisting of lowering short-term interest rates to near zero levels, and buying large quantities of longer-term Treasury securities in order to encourage new spending and maintain the current prices of assets. Because of this policy, aggregate supply and demand remain relatively unchanged in order to maintain stable prices, moderate long-term interest rates as well as maximum employment. According to "Board of Governors of the Federal Reserve System" (n.d.), in order to support continued progress toward the above mentioned goals, the Federal Open Market Committee “reaffirmed in its October 2014 statement its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the committee will assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation.” The committee also anticipated, “based on its current assessment, that it will be appropriate to maintain the 0 to ¼ percent target range for the federal funds rate for a considerable time following the end of its asset purchase program (October 2014).” (Why are interest rates being kept at a low level?). When viewed through the perspective of the Keynesian model (which focuses entirely on the short-run) these policies currently in use are having the desired effect on the economy. Lower interest rates and creating more money are encouraging spending which, in turn, are holding prices and employment within manageable levels. On the other hand, when viewed through the perspective of the Classical model there is a problem with this policy, interest rates cannot be lowered indefinitely and the Fed can only create so much money before it becomes worthless and inflation takes over. Another problem with short-run economics is when the Fed buys long-term and treasury securities it assumes more debt. This debt is manageable as long as interest rates remain low, however when interest rates begin to rise (in order to curb inflation) then the interest payments on the debt alone will exceed the government’s ability to pay for it and the economy risks slipping into a period of structural stagnation, if not worse. In other words, miscalculation in the short-run can create large scale problems in the long-run. Current state of Expectations and their effect on the U.S. economy

Despite the ongoing recession that has plagued the US economy since 2007 expectations are on the rise over the last year and are providing a shift to aggregate demand and supply. As reported by the Index of Consumer Expectations which measures how consumers view their financial situation, the short term overall economy and the long term overall economy, consumer sentiment is rising. As consumer confidence rises and unemployment drops expectations of increased spending leads to a rise in future output by businesses. This is the current state of the US economy which is fueled by fourth quarter consumer spending. Businesses hiring and consumers spending during this crucial financial period shifts the AD curve to the right as it creates expectations of higher income and output for businesses.

Current factors that may negatively impact expectations within the US economy include Japan’s economic recession. Japan acts as a major trading partner with the United States and is one of the world’s largest economies. Businesses within the United States may face decreased production and exports due to spending shifts abroad. These expected changes may lead to a shift in the AD curve as production and potentially hiring gets scaled back heading into 2015. For consumers...

References: Board of Governors of the Federal Reserve System. (n.d.). Retrieved from http://www.federalreserve.gov/faqs/money_12849.htm
Macroeconomics policy and U.S competitiveness. (2014). Retrieved from http://hbr.org/2012/03/macroeconomic-policy-and-us-competitiveness/ar/1
Global policy forum. (2014). Retrieved from http://www.globalpolicy.org/component/content/article/252-the-millenium-development-goals/52614-new-briefing-demands-fiscal-revolution-to-finance-sustainable-development.html
Bureau of Labor Statistics. Retrieved from
http://www.bls.gov/cps/cpsaat25.pdf
Bureau of Labor Statistics. Retrieved from
http://data.bls.gov/cgi-bin/print.pl/news.release/empsit.t12.htm
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Aggregate Demand and Supply Models Essay
  • Aggregate Demand and Supply Models Essay
  • Essay about Aggregate Demand and Aggregate Supply
  • Essay about Aggregate Demand and Aggregate Supply
  • Essay about Aggregate Demand and Supply Model
  • Aggregate Demand And Supply Models Essay
  • Aggregate Demand and Supply Models Research Paper
  • Supply and Demand and Aggregate Supply Curve. Essay

Become a StudyMode Member

Sign Up - It's Free