...Unit 3 Managing the economy Steve Margetts CONTENTS Aggregate Demand (AD) Aggregate Supply Equilibrium Between Aggregate Demand And Aggregate Supply Consumption And Savings Investment Government Spending Exports and Imports Objectives Of Government Macroeconomic Policy Inflation Unemployment Economic Growth Balance of Payments Conflicts Between Macro Economic Objectives Demand Management or Supply Side? 2 4 9 11 17 25 29 31 34 50 71 80 84 87 Page 1 Unit 3 Managing the economy Steve Margetts AGGREGATE DEMAND (AD) Aggregate demand (AD) is the total demand for goods and services produced in the economy over a period of time. DEFINING AGGREGATE DEMAND Aggregate planned expenditure for goods and services in the economy = C + I + G + (X-M) C Consumers' expenditure on goods and services: This includes demand for durables & non-durable goods. I Gross Domestic Fixed Capital Formation - i.e. investment spending by companies on capital goods. Investment also includes spending on working capital such as stocks of finished goods and work in progress. G General Government Final Consumption. i.e. Government spending on publicly provided goods and services including public and merit goods. Transfer payments in the form of social security benefits (pensions, jobseekers allowance etc.) are not included as they are not a payment to a factor of production for output produced. A substantial increase in government spending would be classified as an expansionary fiscal policy...
Words: 24295 - Pages: 98
...Aggregate Demand and Supply Models Renee Chaplin, Angel Cole, Tamara Northern, Katrina Schreiber, Ryan Shaw ECO/372 November 3, 2014 Alexander Heil Aggregate Demand and Supply Models In order to have a strong economy, you have to have certain elements to keep the U. S. economy going. This paper will discuss four different elements that affect our U. S. economy today. Those four elements are unemployment, expectations, consumer income, and interest rates. The unemployment rate in the United States last week according to Trading Economics was 5.9, where as the highest it has ever been was 10.80, and 7.2 last year this time. (Trading Economics, 2014) Although these numbers sound good that is still a lot of people and every person out of work is hurting the economy. The longer a person is out of work the harder it is for them to find employment. “Unemployment negatively impacts the federal government’s ability to generate income and also tends to reduce economic activity.” (Hamel & Media, 2014) The higher the unemployment rate the more effect it has on aggregate demand and supply. If millions of people are out of work then they are apt to spend less money therefore there is less of a demand for the supply, which in the long run continues the ill effects on the economy. Fiscal Policies are how the government tries to make amends to the economy in times of hardship. The government can lower taxes or offer public work programs to lessen the effect on the unemployed. This...
Words: 1523 - Pages: 7
...Aggregate Demand and Supply Models ECO/372 July 31, 2013 Aggregate Demand and Supply Models Aggregate supply and demand are crucial theories in macroeconomics as they assist economists in deciphering events in the past to help forecast the future. The aggregate supply curve model shows the correlation between the total price level of a country, and the quantity of goods and services manufactured by the suppliers of that country. The aggregate demand curve model shows the quantity of goods and services made locally that consumers, businesses, the government and foreigners are willing to buy during a specific time period. Part I – Analysis and Recommendations: Describe the current state of the following economic factors and analyze how each affects aggregate supply and demand. Develop a set of recommendations for the president regarding government spending and taxes based on the economic factors' current state. Unemployment Unemployment peaked in late 2009 through early 2010 and has come down roughly 2% since then (Bureau Of Labor Statistics, 2013). The unemployment rate for those who are 25yrs and older with at least a bachelor degree lingered at around a high 2% in the early to mid 2000's dropping even to 1.8% in August 2006. After, this the percentage slowly started to to increase and quickly grew around 2008. Just over three years after hitting 1.8%, unemployment for 25yrs and older with at least a bachelor degree grew to 5.1% in November 2009. There...
Words: 1778 - Pages: 8
...Aggregate Demand and Supply Models ECO/372 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...
Words: 1572 - Pages: 7
...Aggregate Demand and Aggregate Supply Topic Question numbers 1. Aggregate demand 1-22 2. Long-run aggregate supply 23-27 3. Aggregate supply (short run) 28-63 4. Equilibrium; changes in equilibrium 64-125 5. Downward price and wage inflexibility 126-134 Consider This 135-136 Last Word 137-138 True-False 139-155 Appendix 6. AD in relation to the AE model 156-166 Multiple Choice Questions Aggregate demand Type: D Topic: 1 E: 193 MA: 193 1. The aggregate demand curve: A) is upsloping because a higher price level is necessary to make production profitable as production costs rise. B) is downsloping because production costs decline as real output increases. C) shows the amount of expenditures required to induce the production of each possible level of real output. D) shows the amount of real output that will be purchased at each possible price level. Answer: D Type: A Topic: 1 E: 194 MA: 194 2. The aggregate demand curve is: A) vertical if full employment exists. B) horizontal when there is considerable unemployment in the economy. C) downsloping because of the interest-rate, real-balances, and foreign purchases effects. D) downsloping because production costs decrease as real output rises. Answer: C Type: A Topic: 1 E: 194 MA: 194 3. The interest-rate effect suggests that: A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending...
Words: 10057 - Pages: 41
...Part (A) IS-LM, Aggregate Demand and Aggregate Supply Behavioral Equations, Identities, Equilibrium Conditions and List of Exogenous and Endogenous Variable The IS-LM Model is based upon six Behavioral equations, each describing the determinants of one of the macroeconomic variable considered by the model: 1. Consumption 2. Investment 3. Government spending 4. Tax revenue 5. Money demand 6. Money supply The description of the IS-LM model is completed by three key identities that are defining the links between aggregate demand, aggregate supply and the equilibrium level of income. Aggregate demand: Z = C=I=G --------------------------------1 Since firms produce as many goods and services as demanded in the economy, the aggregate supply is written as: Y=Z --------------------------------2 Combination of the equation 1 and 2 gives income identity for a closed economy Y = C + I + G. This states that in equilibrium aggregate income must be equal to aggregate demand. Exogenous variables: G: Government spending T: Tax on income M: Money supply P: Price level (fixed in the short-run) Endogenous variables: Y: Production C: Consumption I: Investments R: Interest rate Behavior Equations Y= C + I + G C= C0 + Cyd Yd –Cr r I= I0 + Ir r G= G TA = TA + Ty Y LM Behavior Equation L=M L=L0 + LyY – Lr r M=M0/P Production Function Y= Aƒ (K,N) Identities of IS C= ƒ (Y+, r –) I = ƒ (r -) G=G S=...
Words: 1811 - Pages: 8
...Chapter 25: Aggregate Demand, Aggregate Supply and Modern Macroeconomics Questions for Thought and Review 1. The central difference between activist and laissez-faire economists is their differing views about whether the economy is self-regulating. Laissez-faire economists (Classicals) believe the pricing mechanism will bring the economy to an equilibrium (potential output and full employment) while activist economists (Keynesians) do not share that belief. 2. Classicals felt that if the wage was lowered, the Depression would end. They saw unions as preventing the fall in wages, and they saw the government lacking the political will to break up unions. 3. Five factors that shift the AD curve are: changes in foreign income, changes in expectations, changes in exchange rates, changes in the distribution of income, and changes in government aggregate demand policy. 4. Say there is a rise in the price level. That would make the holders of money poorer (the wealth effect). It would also reduce the real money supply, increasing the interest rate (the interest rate effect). Assuming fixed exchange rates, it would also make goods less internationally competitive (the international effect). All three account for the quantity of aggregate demand decreasing—decreasing spending as the price level rises. These initial increases are then multiplied by the multiplier effect as the initial spending reverberates through the economy. 5. Two factors that shift the SAS curve...
Words: 4178 - Pages: 17
...Aggregate Demand and Supply Models Unemployment Rate in the United States is reported by the U.S. Bureau of Labor Statistics. According to Fedec, the unemployment Rate in the United States increased to 6.20 percent in July of 2014 from 6.10 percent in June of 2014. The U.S. jobless rate increased to 6.2 percent from 6.1 percent in June as more people entered the labor force. Wages and hours were unchanged from the previous month. The rate has declined over the past 12 months by 1.1%. The number of long-term unemployed people (27 or more weeks) did not change at 3.2 million in July. 32% of the unemployed were long-term unemployed. The number of people forced to work part-time was 7.5 million and unchanged. Many of these part-time were doing so because their job cut back hours or they simply could not find full-time work. Unemployment causes consumers to have less money and therefore there is less demand in the economy. The aggregate demand curve shifts to the left. Unemployment also reduces the amount of labor in the workforce and this shifts the aggregate supply curve to the left. A decrease in one of the determinants of aggregate supply shifts the curve to the left. Some examples of a decrease would be output falls below the natural rate of employment, unemployment rises, the price level rises, or stagflation happens. Fiscal policy attempts to mitigate unemployment and stabilize the economy. Tax cuts and increased spending are used in an attempt to fight unemployment...
Words: 372 - Pages: 2
...AGGREGATE DEMAND SUPPLY MODELS: ECONOMIC CRITIQUE Although unemployment rates have improved in the last three years, the unemployment rates are slowly beginning to rise again. Millions of Americans are still out of work. Acquisitions, company closings, and massive layoffs, among other factors, are contributors to the ongoing issue. Employers in 20 states, which are almost half of the United States, have cut jobs. The unemployment rate increased in 18 states, decreased in 17 states, and did not change in 15 states (Newsmax Media Inc, 2013). Most Americans expect the government to solve economic issues. Unemployment, expectations, consumer income, and interest rates have an existing effect of the economic factors on aggregate demand and supply. When unemployment rates are high, households have less money to spend. If there is less money in a household, people will need to budget and focus on the necessities. Consumer income affects the economy because it reduces the amount of money spent in other areas, such as entertainment, sports, and dining. The less money people have, the less demand there is. Unemployment reduces the supply demand and labor demands. Companies downsize and lay off employees to save money that reduces the excess of supplies. Unfortunately, this reduces jobs and causes the economy to fall. To shift the decline in the economy, there needs to be a demand to make supplies and products. Interest rates, taxes, inflation, and regulating the cost of...
Words: 1095 - Pages: 5
...Aggregate Demand and Supply Model Option Two Simona Lewis ECO/372 January 14, 2015 Christopher Dabbs Aggregate Demand and Supply Model Option Two Describe the current state of following economic factors. The Interest Rates. When it comes to the interest rates, there are several things that he or she needs to know, such as long-term and short –term interest rates. The term interest rates are the amounts “that are charged or paid for the utilization of financial assets” (Colander, 2013, p 657). On-the-other-hand, the term long-term interest rate is referred to the amounts for the use of the financial assets for the extended repayment periods for his or her loans (Colander, 2013). For example, when he or she is buying a house that has a mortgage of 15 to 30 years that is long-term (Colander, 2013). However, with the short-term interest rate, are the amount paid for the utilization of the financial asset with “shorter repayment periods, such as a deposit and checking accounts” (Colander, 2013, p. 658). So, in-other-words long-term interest rate is decided by the loanable fund market, and the short-term interest rate is decided in the money market (Colander, 2013). Now, since he or she understands how the interest rates works, in The United States, the interest rates are actually cheap, but “not the long-term rate are not that cheap” (Conerly, 2013, para. 4). Therefore, the short-term interest rate is controlled by the Central Bank, which is The United States Federal Reserve...
Words: 748 - Pages: 3
...below six percent; the lowest in over six years. While there is still cause for concern with as many as 3.7 million long-term unemployed Americans, this is welcome news for the aggregate economy. With more Americans employed and purchasing goods and services, aggregate demand for goods and services rises and creates still more employment opportunities. It is vital to recovery that this trend continues. Expectations Effective monetary policy must be credible (Colander, 2013). At present, consumer confidence, as measured by The Conference Board, is up 5.5 points in October to 94.5 rebounding from 89.0 in September. Expectations increased even greater to 95.0 from 86.4 in September. Both index increases infer growing confidence and positive expectation in current policy. These data will translate to more spending in the aggregate leading to more employment with the probability of increased productivity to supply the demand for goods and services. Consumer Income The US Department of Commerce Bureau of Economic Analysis (BEA) reports personal income increased 0.2 percent for the month of September 2014, and disposable income rising 0.1 percent during the same period. Of note, personal expenditures dropped 0.2 percent equaling this increase. Tis effectively negates any positive contribution to aggregate demand, and in fact, has potential to create an over-supply of goods and services. Interest Rates The Federal Reserve reports no significant changes in key interest rates during the...
Words: 420 - Pages: 2
...Consumer Income, Interest rates, Aggregate demand and supply Consumer income in the United States can be described as better than most compared to other countries. As of June, consumer income has increased .5 percent and personal disposal income has increased .4 percent (). Although the consumer income increased the consumer expenditures continued to decrease. This displays the consumer’s conservative spending habits. The consumer is yet to fully believe that the economy will continue to strengthen. As history has proven before wages are take time to increase with prices if at all. A middle class individual would be the most to agree with this statement. The rich do not need the help and the unfortunate have the ability to apply for some type of assistance. Interest rates in the United States are the lowest they have been in years. This shows the government’s stance on lending money. They are trying to get consumers to file for loans and possibly encourage banks to approve these potential homeowners. If a consumer is looking to purchase a house, car, or even take out a personal loan this is the time to do it. A homeowner might even consider refinancing his or her home. There are a few factors that a homeowner should consider when trying to refinance. With interest rates this low and consumer income increasing, one would expect consumers to increase their buying on more significant items. Aggregate demand and supply are viewed by economists to make assumptions or predictions...
Words: 358 - Pages: 2
...Unemployment To be unemployed means there is a low to zero income coming in which makes the economy to have less demand. Because of the less demand, aggregate demand curve shifts to the left, and if unemployment reduces supply of labor in economy, the aggregate supply curve shifts to the left. This could only happen if the unemployed loses hope of finding a job and gets discouraged looking for one. Some economists argue that the best way for the economy to not get stuck in a recessionary gap is for the government to play a role in managing it. A major way government can be influential to the economy is through its fiscal policy. This means, there will be changes in government such as, low unemployment, price stability, and economic growth. If the Real GDP in the economy turns down, that will cause more people to be unemployed and this will result in automatically receiving unemployed benefits and these unemployment benefits will naturally boost government spending. Keynesians are likely to propose a decrease in government purchase and increases in taxes to shift the Aggregate Demand from the left. Expectations We live in an era where an enormous amount of information is easily and readily shared by more persons than ever before. However large the quantity, the overall credibility and quality of the shared information is at best, given in the form of opinion or from very shaky ground. Included in this vast ocean of opinion-laden information are the variety of viewpoints...
Words: 1572 - Pages: 7
...Aggregate Demand and Supply Models ECO/372 Aggregate Demand and Supply Models The following report will detail out the current state of the U.S. Economy. The report will discuss the following: * Current economic state in regards to unemployment, expectations, consumer income and interest rates * The existing effect of the economic factors on aggregate demand and supply * Fiscal policies that are currently being recommended by government leadership * The effectiveness of those fiscal policy recommendations from the Keynesian and Classical model perspectives. Unemployment rates fluctuate when the supply and demand for human resources are out of balance. The supply and demand are a result of the interaction of economic, policy and structural factors. Economic factors affect both supply and demand. The demand for goods and services increases production which results in the demand for workers, increasing the employment rate. The common thought among economists is that market-driven economies move in cycles and when they drop below certain levels unemployment may result. The moving of production from high wage countries to low wage countries is another factor that increases unemployment. A declining manufacturing sector will result in not enough jobs to go around along with third world competition. While new jobs are being created in the technology and service sectors it is not enough to make up for the amount of jobs that have been lost due to moving...
Words: 1223 - Pages: 5
...Aggregate Demand and Supply Models John Distel ECO/372 12-10-2012 Ching Xu Aggregate Demand and Supply Models According to the United States Census bureau’s report, median income for a family household is down nearly 1.7%, from 2010 to 2011. That means for a family of four in 2010 they were living on approximately $63,331 per year. In 2011 that number went down to $62,274. This does not seem like much but this can be very hard on a family especially with the costs of everything continuing to go up, that $1100 has to be cut from somewhere in the families budget, because unlike the federal government they cannot just continue to borrow money all the time. In fact if a family borrows money to live on eventually this starts to eat into the family budget even more trying to pay back borrowed money. This report shows that the median income levels has been gradually going down like this for a consecutive four years now and are expected to continue the same trend on into 2012, according to the United States Census bureau. These numbers can vary quite a bit depending on what type of a house hold that is being looked at. This report broke down the types of households, everything from sex of house holders, to race, age, even what geographical area the household was in. One difference that is different is the fact the men and women are the same; both have lost an average of 2.5%. References Denavas- Walt, C., Proctor, B. D., & Smith, J. C. (2012). Income, Poverty, and...
Words: 288 - Pages: 2
