...Aggregate Demand and Supply Models Name ECO/372 Date Instructor Name Aggregate Demand and Supply Models Fiscal policy conveys the government’s selection concerning the use of government expenditures and taxation to regulate the aggregate level of economic activity. In contrast, fiscal policy includes changes in the level of government expenditures or taxes, and their financial position. The main points of fiscal policy generally focus on deficits and debt, beside taxation, and the level of spending. Monetary policy consists of the central bank’s control of the availability of credit in the economy to accomplish the intentions of economic policy. Control can be applied through monetary system by operating on aggregates; money and credit supply, interest rates, and exchange rate. However, the fiscal policy may impinge on monetary policy. Expansionary fiscal policy increases government spending or decreasing taxes (Colander, 2010), but the increase of government spending can cause an excessive deficit or debt. However, the excessive deficit, in turn will lead the government to borrow to finance the deficit. In addition, lowering taxes decreases the government income, increase disposable income, and economic growth. Contractionary fiscal policy decreases government expenditures or increases taxes (Colander, 2010), but contractionary is the purpose of decreasing aggregate demand, and controlling inflation. In addition, contractionary fiscal policy may result in some unemployment...
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...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...
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...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 past three months. The...
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...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...
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...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=...
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...Supply and Demand Economic Critique Rachel Middlebrook ECO/372 February 4, 2014 Rick Pretzsch Supply and Demand Economic Critique The United States economy is determined by a number of factors, such as; gross domestic product (GDP), unemployment rates, consumer income, and interest rates. Everything the U.S. produces is measured by the GDP. When the GDP turns negative, the economy can enter a recession. If this negative GDP continues for years the country is considered in a depression. Supply and demand are the forces drive the U.S. economy. Supply includes employment and natural resources such as oil. Demand, or personal consumption, drives 70% of the economy. The current spiral of the United States economy can be attributed to several factors. The U.S. has gasoline prices at an all time high. Consumers are buying less because they are spending more money just to get to work each week. Vacation spending and shopping sprees are not an option to most Americans. The Federal Reserve also serves a role in the weakening of the U.S. dollar. The Federal Reserve is lowering interest rates making the dollar worth less. This is an attempt to try to avoid another bank scare in which many Americans withdraw their money out of the banks at the same time. Finally, subprime mortgage rates have had a large influence on the current downturn of the dollar. After several shifts in the mortgage interest rates, many could not afford these homes any longer and were foreclosed or they...
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...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...
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...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...
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...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...
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...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...
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...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...
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...Aggregate Demand and Supply Models Introduction Social, technological and political changes in the US and around the world affect the U.S. economy today. Even if the U.S. economy presently remains as one of the world’s largest economy, the country is now in deep recession and must The purpose of this paper is to understand the prevailing economic trends in the US particularly on unemployment, interest rates, and consumer income including the expectations of both the consumer and business sectors. This paper will also discuss the effect of these economic indicators on the aggregate supply and demand and the evaluation of current fiscal policies that were recommended by the government. This paper aims to let future business managers be aware of the importance of comprehending current US fiscal policies as it outlines the blueprint of change to the US economy. Current Economic Trends Unemployment is a term that you will hear often when spending time in any city in the United States. It is an issue that is spoken of from the dinner table to the oval office. The United States experienced its “worst downturn since the Great Depression” but continues to recover adding 176,000 jobs to the private sector in March-April 2013 and reducing unemployment to 7.5% (Bureau of Labor Statistics, 2013). President Barack Obama has introduced large plans to reform banking in America. The people of the U.S. expect to see banks become more regulated, they expect that home loans will be reasonable...
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...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...
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...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...
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...Aggregate Supply & Demand Models Marie Diaz ECO/372 9/11/14 John Smith The United States has fluctuating economic system. Many factors contribute to the current state of the economic factors unemployment, expectation, consumer income, and interest rates. The following is an analysis of how each factor is performing at the present moment and how each of these factors are connected and can effect each other in determining what decisions need to be made for the U.S. government going forward. Unemployment Fiscal policy plays an important role with unemployment. The current economic model is one in which " unemployment can arise, but can be mitigated by tax cuts and public spending increases" (Princeton University, 2014). The problem with this method is that it is financed with government debt and can be fiscally costly in the long run. In terms of model perspective, the Keynesian and Classical models differ in their treatment of unemployment. The Keynesian model views unemployment as the normal state because it is part of the business cycle. It holds that the government must get involved to change the situation. AS is horizontal, and government intervention may be required to reach target outputs. Current fiscal policies to improve this type of unemployment are deficit spending and monetary policy. The Classical theory, on the other hand, treats unemployment differently. It seems full unemployment as the norm and as the level it will return to long...
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