Aggregate Demand and Supply Models Essay Example for Free

Aggregate Demand and Supply Models Essay 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) â€Å"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), â€Å"Personal income fell 3. 6 percent in January, the biggest decline in 20 years† (p. ). 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. â€Å"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 can happen. If the interest rates rise, consumers may not be inclined to purchase home and auto loans. Ehling (2013), â€Å"Since April, mortgage rates have jumped almost 1 percent, causing concern for those in the market to buy a home† (Para 2). This rise in interest rates can hurt businesses because fewer consumers are spending money. However, businesses can also use this to their advantage because they can put pressure on consumers to buy sooner rather than later before the rates increase even higher. When rates increase, the economy is usually strong and in good health. The Fed is usually trying to slow down economic growth. While interest rates rise, the aggregate demand curve shifts up and to the right. When interest rates are lowered, the aggregate demand curve shifts down and to the left. The short-term aggregate supply curve is also affected. When interest rates are low, this will cause the curve to shift to the right, and when the interest rates are higher the curve shifts to the left. It would be wise to lower the interest rates a little because the economy is still recovering. Raising the interest rates in a span of weeks could result in hurting the economy’s health. In today’s economy, if we lowered interest rates a small amount this would increase consumer spending and will create more jobs. Recommendations After reviewing the above mentioned, we have determined the following recommendations to help the economy grow. The above are in some way or another intertwined and affects each other as well. Our recommendation is to spend less, owe less, and grow the economy (Joint Economic Committee, 2011). To reduce government budget the use of more fiscal consolidations are essential. These programs ultimately reduce government spending, which in turn can accelerate short and long-term economic growth. Increasing tax rates are not good for the economy because it affects the long-term economic growth. In addition, decreasing the number of government workers would be a way for the government to reduce its spending, along with compensations (Joint Economic Committee, 2011). Eliminating agencies and programs is also another way to reduce spending costs. Last, reforming and reducing transfer payments to households will boost GDP growth because it will enhance the credibility of fiscal consolidation programs (Joint Economic Committee, 2011). This will also encourage younger workers to work more, save, and retire older. Part Two Evaluation of Recommendations Keynesian economists believe in applying financial and fiscal policies to lessen the effects of economic recessions. Keynes argued that in times of recession, spending is a public good that benefits everyone (Colander, 2013). The government should be spending and providing jobs to stimulate the economy. Unfortunately, during a recession most do the opposite. Businesses and government seems to cut back on military spending and cause major layoffs. Businesses are reluctant to invest because they already have more capacity than they can use. However, the government can jump-start the economy through increased spending and investment. These investments would go a long way to strengthen the economy. Currently the leadership in the White House has implemented policies that stem from the Keynesian theory. This is in large due to the previous recession that the country faced after the attacks of 9/11. The Keynesian theories allow the government to intervene and help stimulate the economy. During a stagnate or failing economy the government generates revenue and jobs sometimes by adding money into the economy and thus keeping interest rates low. This has shown to be an effective approach because the economy is starting to recover and grow again Classical economists believe on creating long-term solutions for economic problems. They argue that any imperfections in the economy will be corrected automatically, and no government intervention is needed. â€Å"While the Keynesian economists believe in implementing monetary and fiscal policies, the classical economists believe that the best monetary policy during a crisis is no monetary policy† (Patil, 2012). Although both theories are important, one may say the best solution is to have a mixture of both theories. There are many economic situations where one theory might work better than the other is; however, a wise economist is not only preparing for short-term solutions, but long-term solutions as well. Conclusion In conclusion, it is important in business to be open to looking at situations (i. e. the economy) from angles. Looking at the economy from both points of views could be critical to the success and forecasting of our economy in the future. However, after reviewing both Keynesian and Classical we still feel that the Keynesian approach will have a more significant impact on the economy. The recommendations we have suggested for the President reaffirm this.