Aggregate Demand and Supply Models

As the group of economic advisors to the U.S. President, the team has goals they need to achieve. As a team we need to analysis and make recommendations on the following areas: unemployment, expectations, consumer income, and interest rates on how it is affecting the aggregate supply and demand. The team also needs to evaluate each area and make recommendations to make improvements to the economy. The following information will be the team efforts to pull together the best evaluation and recommendations to the economic issues. Unemployment

Today’s unemployment rate is at an all-time low but for the government to keep the unemployment at the low rate there are some issues that need to be addressed. Part of the issues is to continue training of employments so they can be employable. With working all employees to keep them trained and up-to- date with the new job opportunities will help the economy grow and be stronger. One recommendation would be to keep people fully employed. The following model would explain a good plan and good business cycle to keep people employed.

(A Model of the Macro-Economy: Aggregate Demand and Supply, May) This would be one goal of the economic advisor team to reach so that the U.S. government can be strong and prepare for a strong economy. In the case of the unemployment issues the Keynesian perspective would be a good recommendation due to it’s a short-term policy. The economy need to have the unemployment issues addressed in a timely matter so the U.S. government can keep the employee working at a full-time status. This would be a positive step for the economy to make the economic stronger. Expectations

Expectations play an important role in the state of affairs and present conditions of the country. If we take the recent housing bubble bursting and the resulting decline of the housing sector of our economy, prices have fallen significantly, to the point that people cannot get mortgage loans due to the bank new criteria on lending. This was driven by the new expectation that the housing industry has to regain the confidence of the consumers so that the housing demand will rise one again which will in turn cause house building to resume and build up to the level that it once was.

The automobile industry has taken a beating also in this slow moving economy, which happened as a result a fall in consumer confidence, and overproduction. Automobile manufacturers responded to the contraction in demand by cutting back on production, thereby causing layoff, car dealerships to close, and a loss in market share. In recent months, however;automobile manufacturers have restructured their organizations, with the help of the government bailout, and have resumed production and have gained some of the confidence of the consumer to start spending money again.

Consumer expectations will continue to rise, and based on one major changes that occurred in the history of the Iraqi war, all soldiers have returned home, which will result in the attitudes of the of the consumer gaining confidence in the United States economy and its ability to rise up out of any downturn and return to a prosperous economy. This will result in an increase in spending, which will in turn increase production, companies will return the workforce to their normal levels, and aggregate supply will have to catch up to aggregate demand. When these changes become a reality, all industries will benefit including the housing sector, causing the buying public to regain their confidence in the system, and therefore begin spending their money again. Consumer Income

Consumer income has a huge effect on aggregate supply and demand just as the aggregate supply and demand can affect consumer income. If a consumer income increases, the consumer will spend more money. When a consumer spends more money, the demand for goods and services increases, and businesses have to increase production to meet the demand. When businesses increase production to meet demand, they will spend more money on raw materials and employees. This increase in spending will allow them to hire new employees, which lowers the unemployment rate. When the unemployment rate decreases, more people are earning an income to turn around and spend. “If large portion of the people in the economy suddenly decides to save more and consume less, expenditures would decrease and saving would increase.

If that saving is not immediately transferred into investment, and hence back into expenditures, investment demand will not increase by enough to offset the fall in consumption demand, and total demand will fall. There will be excess supply. Faced with this excess supply, firms willlikely cut back production, which will decrease income. People will be laid off. Aspeople’s incomes fall, both their consumption and saving will decrease. (When you’relaid off, you don’t save.) Eventually income will fall far enough so that once again savingand investment will be in equilibrium, but then the economy could be at an almostpermanent recession, with ongoing unemployment” (Colander, 2010, pp. 231-232). Interest Rate

Monetary policy is one resource that the Federal Reserve and the government have to help improve the economy, depending on the results the government wants to achieve; it can use the interest rate as a way of both increase demand and supply or decrease it. Interest rate is the cost of borrowing money. Industries such as real estate and banking are two of the most affected by the changes in interest rate. The fluctuation on the interest rate can increase or decrease. When interest rate goes up, spending and borrowing become, more expensive, affecting the consumer demand for mortgages and loan products. As a result, house prices will fall and investments decrease. Even when the increase of interest rate could be behind the decision of lowering prices level (inflation), it have the negative impact of reducing output. On the other hand, when interest rate falls, money is pushed into the economy generating an increase of demand for goods and services and production. The demand for dollar during interest rate period increases the cost of buying and selling assets, whereas reduced the cost of borrowing money, spending, and investments.

The performance of the economy is very important to the citizens of a country. When people stop to analyze the economy of a country, we usually look for high production, inflation rate, and unemployment rate. However, these are not the only factors that affect the economy but also consumers and their behaviors. As consumers people may think they have no control over the economy situation or that theirdecisions are not taken in consideration. However, people spending behaviors with the influence of monetary and fiscal policies can help to determine the direction the economy could take. The United States economy is currently weak; as a result, the fed decided to decrease the interest rates in banks as a way of persuading people and businesses to borrow money and stimulate spending. This strategy was supposed to help on recovering the economy; unfortunately, people, and business demand for borrowing money is low because they are afraid of increasing their debts, and banks are reluctant to lend money because of the consequences of the housing crisis.

However, despite the low demand for people to borrow the FED expressed a slowly increase in the economy as a result of the purchases during Christmas time. In addition, there are indicators of a low improvement in the labor market and household spending. During this time when consumers’ confidence in the economy is low, people tend to hold back their funds decreasing spending. Some people may decide to spend and improve the economic activities; however, to think that decreasing the tax break of the middle class could alone significantly change spending and get economy out of recession, is wrong. Besides cutting taxes some of the decisions the government should take to improve the economy are spending and investing on creating jobs. By investing on labor, the government can help to create more jobs in different field such as law enforcement, infrastructure, and education.

It is known that tax cuts in addition to stimulate economy and creating job opportunities, also increases government revenue. This resulting increase in revenue can help the government to increase spending on social programs and health care. As a result, the government will borrow less money and possible reduce its current debts, which can relieve the supply of money lowering interest rates. Lower tax breaks and lower interest rate are good for the economy because they help business and manufacturing sectors allowing them to invest more on their business, and create job opportunities. Once more jobs are created and consumer spending goes back to its curse, the economy will move out of deficit. Eventually, tax revenue will rise as a result of the high economic activities, and government will be able to manage its budget deficit by adjusting taxes and fiscal policies.

Reference
A Model of the Macro-Economy: Aggregate Demand and Supply. (May 30, 2000). Retrieved from http://www.harpercollege.edu/mhealy Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.

Gregory, P.R. (2011). The Payroll Tax-Cut Consensus: Another Keynesian Sand Castle. Retrieved from: http://www.forbes.com/sites/paulroderickgregory/2011/12/20/the-payroll-tax-cut-consensus-another-keynesian-sand-castle/ 5 comments, 0 called-out