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Aggregate Demand and Supply Model

Autor:   •  September 28, 2017  •  1,461 Words (6 Pages)  •  878 Views

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The low interest rate had an impact on economic growth in the last year or so. Since 2008, high unemployment, and depressed income levels meant that households and businesses did not have the money to capitalize on the low rate. As the job market continues to grow and rising incomes create a willingness to spend more, the rate may help in boosting aggregate expenditure. Our advice would be to leave the interest rate at its current low level to facilitate the spending of growing incomes.

Keynesian Perspective

According to the Keynesian perspective as it relates to unemployment the uncertainty that the goods made by individuals would meet the demand of the people, there is a high chance that unemployment would occur. This has nothing to do with people’s unwillingness to want to work but rather with the lack of organization of the economy. In an event like this it is the obligation of the government to intervene with spending and changes to taxation to stimulate the economy. On the subject of consumer income, the Keynesian perspective dictates that when consumer income is low, so is consumer spending. Therefore, with government spending and tax-cuts, these actions could help stimulate the economy by allowing consumers to have more disposable income to purchase goods and services and restore jobs of those who are unemployed. Last, the Keynesian perspective surmises that interest rates play a major role when consumers and businesses make spending decisions. Decreasing interest rates makes it much more advantageous for businesses to invest and make consumers more willing to spend.

Classical Perspective

The recommendation from a classical perspective to the president is to leave well enough alone. The government should not intervene in regard to the economy. Free trade and free markets are encouraged for the economy to self-regulate; this would place total reliance on the market. The trend of the market would be the guide in the economic activity, which would lead naturally to ultimate equilibrium. The unemployment that exists currently is a surplus of labor. Implementing the classical stance would decrease labor wages provides employers to hire more employees, thus leading to equilibrium; decreasing the unemployment rate to low levels. Those who continued to be unemployed are those who do so voluntarily. The labor markets would have to work in precision in order for the economy to self regulates. This would also hold true for the financial industry; the increase in the investment would cause for an increase of the rate of interest. This activity would entice an increase in savings to borrowers, which in turn raises the rates in interest leading to full equilibrium restored. Basically, aggregated supply will help create the aggregated demand that will lead to full employment restoring the economy to full state of operation.

In conclusion, the recommendation is to leave the interest rates low to assist our economy in its continuing strive for stability. The fact is every dollar counts to Americans. The unemployment rate is slowly on the rise and is increasing the aggregate demand. Leaving the interest rates down and with the unemployment rate steadily decreasing, there ultimately will be an increase in spending and ensure that our economy is back in the stable condition as it has been in previous years.

References

BLS. (2013). Retrieved from http://www.bls.gov

Colander, D. C. (2010).Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.

Evans, G. (1999). Retrieved from http://www2.hmc.edu/~evans/chap2.pdf

Trading Economics. (2013). Retrieved from http://www.tradingeconomics.com/united states/inflation-cpi

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