Aggregate Demand and Supply Models
Team B
ECO/372
March 26, 2015

Aggregate Demand and Supply Models
Many factors within a nation’s economy have the ability to effect one-said nation’s aggregate supply and aggregate demand models. Of these factors, four will be explored through the course of this specific critique and it should be noted, that the specific nation to be observed is the United States of America. The specific factors to be observed in the United States’ economy are their unemployment, their expectations, consumer income, and interest rates. In addition to identifying these four factors and their economic effects, there will be identified what fiscal policies have been put in place by the United States government in order to aid the economy and finally, there will be an evaluation of these fiscal policies regarding their effectiveness from both a Keynesian economic perspective and that of a classical economist.
Unemployment
A nation’s unemployment rate, as can be expected, is calculated by dividing the total sum unemployed persons by the number of total persons available for within the nation. This formula yields the number that is considered the unemployment rate for whichever nation is in question, in this case though, the nation that is the focus of our investigation is the United States. According to the Bureau of Labor and Statistics website (2015), “the unemployment situation in the United States has been reduced to 5.5 percent. This decrease as reported in February of 2015 signifies an overall decrease of 1.2 percent in the United States unemployment rate just within the last year alone” (Bureau of Labor and Statistics, 2015), but the question is then asked, “What allowed these changes to take effect?” This leads into the identification of specific fiscal policies put in place by the government that may have helped decrease the unemployment rate within the United States, but first, what effect does the number of unemployed have on the aggregate supply and aggregate demand models of the United States? The effects that an economy feels in regards to unemployment as it relates to aggregate supply and demand is quite simple to understand, but relies on the understanding of what is causing a firm or business to “cutback” on cost(Washington University in St. Louis, n.d.). More specifically, is it a lack of product demand that is causing a cutback as it relates to cost?
In the case of the United States, I believe a lack of demand for products are the cause for higher unemployment. Because of the elevated rate of unemployment, and a decrease in disposable income for American families, in the United States, there is less demand for products that are not necessary for survival. Amenities such as the top of the line flat screen television are looked upon as less important because those who are unemployed must keep whatever funds they have access to for more important items such as food or shelter. What is interesting about this effect of unemployment though is that when Americans do not spend money on those products that are not absolutely necessary for survival, there is the potential for more unemployed as the company’s manufacturing those products have less demand and are therefore making less money with which to pay their personnel. This may then lead to more unemployed over time. With this in mind, how will the government help to repair the unemployment of its people? Which fiscal policies are in place and may be put in place to aid in the regeneration of employment? Fiscal policy is described as government spending and taxation that is utilized as a way to influence the nation’s economy. While this effect can be either negative or positive it generally leans toward the positive. How then does fiscal policy relate to reducing unemployment? There exist many traditional models to utilizing fiscal policy to help reduce unemployment within the United States. For example, on tactic is to lower an economies tax rates which subsequently allows for more money in taxpayers’ pockets ultimately leading to greater consumerism, however, for the purpose of this critique, this is not necessarily one tactic that is being utilized by the United States to stimulate the economy. In order to help stimulate the economy and reduce the unemployment rate in the United States, President Barrack Obama and his administration have signed into effect 18 tax cuts directed towards small businesses’ (National Economic Council, 2012). Additionally, the president has also helped to establish two small business lending firms and expanded lending programs through the Small Business Administration (National Economic Council, 2012). What is significant about these initiatives is that they allow for more funds to be placed into small businesses that then allows for a business to, hopefully, expand and with this expansion, aids to create more vacant positions that must be filled by the unemployed throughput the nation. In theory, it seems that these types of policies may in fact work wonderfully; however, economists that subscribe to different ideals may disagree with one another as to how the policies may actually unfold. In short, Keynesian economics can be described as a prescribed realm of economic threat that believes the best way to achieve optimal economic performance is through government policy, but how does this relate to the current recommended government policies intended to help reduce Americas unemployed? According to Investopedia, LLC (2015), “the term “Keynesian economics” was used to refer to the concept that optimal economic performance could be achieved – and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government.” With this definition in mind, it makes sense that those that subscribe to Keynesian economics would look upon the previously explained type of fiscal policy as favorable. With this view of economics, the end would result in a positive influence on the economy and as a way to combat unemployment within the United States, however, how would those that subscribe to classical economics see these enacted policies? A basic definition of classical economics is that should a change in supply come to pass so too will a change in demand. Essentially, this means that an economy would constantly be adjusting itself or moving towards a new equilibrium. What does this mean in relation to fiscal policy though? As previously stated, classical economists, basically, believe that an economy will, in a way, work itself out as it is constantly moving towards equilibrium, however, with this way of thinking, they are essentially saying, “it is what it is.” This line of thinking, in my opinion, does not lend itself to being proactive and combating the unemployment rate of the United States because “it is what it is” and because of this type of thinking, I feel that classical economists would not necessarily look upon the small business initiatives aimed to create more jobs in a favorable light. It would appear that they would just want the economy to “ride it out” and see where the dust settles.
Expectations for 2015
The aggregate supply and demand curve shows the relationship between the nations overall value of the goods and services produced in the United States. Some of the factors that affect this curve are supply stocks, resource price changes, and changes in expectation for inflation (Investopedia, 2015). Currently the United States has seen a rise in their overall demand curve from 2014. U.S. economist expect in 2015 to see gross domestic product growth increase to 3.9 percent. John Whitefoot predicted this, because in 2014 there was continuous GDP growth from quarter to quarter throughout the year (Whitefoot, 2015). What this means is that the general public is employed and spending their money. This is proven by the dramatic increase in sales throughout the United States, which proves that as Americans make more money they will also tend to spend more of that money.
The fiscal policy that the government states maybe a budget solution, which is founded under the Congressional Budget Impoundment Control Act of 1974. This act basically states that the two budget committees in the house and senate would be tasked to draft a budget resolution which has been set forth by the budget authority (Alexander, 2015). What does this mean for the United States economy expectation? This committee looks at the United States as a whole and finds solutions in areas where they can make changes for example increasing budget cuts to help stabilize the economy. In recent news there has been talk of cutting the United States military budget, these budget cuts come from the Keynesian Economic Theory which allows for public decisions to be made on behalf of the United States government.
Consumer Income
Consumer income is one of the many factors that stimulate the economy and also influence GDP curve (gross domestic product). The US economy has been on a roller coaster for the last couple of years due to the recent recession, but by the end of 2014 quarter and the beginning of 2015, it appears to be that the US economy might finally be stabilizing. According to the U.S. Department of Commerce Bureau of Economic Analysis (2015), personal income increased $50.8 billion or 0.3 percent in January 2015. Wages and salaries have also had a steady increase of $42.4 billion in January (U.S. Department of Commerce Bureau of Economic Analysis, 2015), thus Americans having more disposable income. The month of January 2015 was a good month for all American consumers; inflation has declined in both food and crude oil giving Americans a little extra cash to spend. (“US Consumer Spending, Incomes Rise; Inflation Slumps,” 2015) Consumer income is highly linked to wages, taxes and fiscal policies, the steady rise in income has lead the average consumer to have a little extra cash in their wallet that will later be used to consume goods and services that in return will fuel the economy and boost GDP.
Since employment plays a large role in consumer income it is important to note that in the beginning of February companies across the US have hired 295,000 workers, especially in the food industry, this has many economist supporting the idea that Americans are using their extra cash on nights out. (Payne, 2015) Consumers are thrilled by the availability of the increase in jobs, lower crude oil prices. Which in return are putting more money into the consumer’s wallet, and in return, they are spending it in goods and services. The growth in Real GDP in the fourth quarter of 2014 reflected a positive contribution on consumer spending, and the economy is projected to increase even more in 2015.( U.S. Department Of Commerce Bureau Of Economic Analysis , 2015) By applying the Keynesian model to wages, the US economy has been able to boost up.
Interest Rates
In 2007 a great financial crisis began that became the most hurtful period of global financial strains since the Great Depression. This period led to a deep and prolonged downturn of the global economy. In response, the Federal Reserve took extraordinary actions in response to the financial crisis in order to help stabilize the U.S. economy. One of these action included reducing the level of interest rates to almost zero. The logical thinking behind these low interest rates, was that households and businesses would be able to finance larger spending to help support the prices of other assets such as houses and stocks.
Unfortunately low interest rates aren’t all positive. There are unintended costs to keeping low interest rates for a prolonged period of time. Low interest rates are associated with both the housing boom and increasing household debt. Low interest rates are dangerous due to the fact that they provide tempting incentives to spend and purchase rather than to save. Over a long period of low interest rates, these rates will penalize those who do save and those who tend to rely more heavily on the income generated by interest.
The effectiveness of the classical model cannot be seen in these low interest rates since the Federal Government sets the rates. The Classical Theory calls for no government intervention, since with this model it is believed that the economy would self-correct with no need of government interference. However, the Keynesian model calls for the government to interfere to correct the instability in the economy. By applying the Keynesian model to today’s economy, the government will be able to correct the problems associated with both inflation and recession.
As we see in this brief critique of the US economy, many factors affect that aggregate demand and supply models. Unemployment, country expectations, consumer income and interest rates are only four of those factors. As it was explored above, the US economy is taking small steps forward to recover from the recent recession, but according to the Keynesian model there is more work to be done. Many fiscal policies have been put in place to boost the economy, specifically those that support unemployment and the increase in wages and salaries. US citizens hope that in the next few years the economy will continue to grow and be what it used to be.

References
Alexander, R. (2015, March). Don't Bust the Budget Caps. Retrieved from http://www.usnews.com/opinion/economic-intelligence/2015/03/04/congress-should-stick-to-the-budget-control-act-in-fiscal-year-2016
Investopedia. (2015). Macroeconomics - Aggregate Supply & Aggregate Demand. Retrieved from http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/aggregate-supply-demand.asp
Whitefoot, J. (2015, March). U.S. Economic Outlook for 2015. Retrieved from http://www.profitconfidential.com/economic-analysis/u-s-economic-outlook-2015/
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Bureau of Labor and Statistics. (2015). Employment situation summary. Retrieved from http://www.bls.gov/news.release/empsit.nr0.htm
Washington University in St. Louis. (n.d.). Demand, supply, and unemployment. Retrieved from https://muddywatermacro.wustl.edu/demand-supply-unemployment#what-determines-employment
National Economic Council. (2012). Creating an economy built to last. Retrieved from https://www.whitehouse.gov/sites/default/files/docs/small_business_report_final.pdf
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Kliesen, K. L. (2011, April). Low Interest Rates Have Benefits...and Costs. Retrieved from http://www.stlousfed.org/publications/inside-the-vault/spring-2011/low-interest-rates-have-benefits-and-costs