Maintaining a stable economy is no small challenge for any nation however possessing the ability to change and invent new and created ways of maintaining makes for a thriving economy. This newsletter will summarize the different economic factors that affect aggregate demand and supply such as unemployment, expectations, consumer income, and interest rates within the United States. Additionally, what fiscal policies are recommended by the United States government and whether or not these policies are effective and getting them back on track are discussed. Unemployment
In the current state of unemployment as of July 2013, twenty eight states have had increases, eight states decreases, and fourteen states have had no change in unemployment rates, U.s. Bureau of Labor Statistics (2013). It was also reported that in June 2012 the rate was lower by .8 percent from 7.4 percent. While unemployment rates started to shoot to a high not seen in years, in 2008, the economy almost went into a recession. After President Obama took office he signed the Recovery Act in 2009. This act was the catalyst that sprung the economy out of its downward spiral and drove unemployment rates down. The act created more American jobs for out-of-work Americans bringing in 3.5 million jobs, Executive Office of the President (2013).
Unemployment is consistently fluctuating and as of recently, the rates have been going down. Due to the government bail-outs and the Reinvestment Act also of 2009, more and more jobs have been created. Construction, road repairs, transit system enhancements and the auto industry in the U.S. have been invested in to restore jobs to the country. As of July 2013 some 7 million jobs have been added to the economy via private sectors contribution of employment for a span of 40 months. This just goes to show that the Recovery Act and the Reinvestment Act have made a sizable impact positively on unemployment to present.
Consumers’ expectations of the economy and where it stands plays a vital role in the consumption expenditures. According to Fazel: “It has been argued that customers’ expectations about the economy’s future should have an impact on consumers’ decisions about how much to consume and how much to save. While consumers’ expectations seem to be a strong predictor for future consumption expenditures, there are potential statistical problems with the use of current available estimates of consumer’s expectations.” Consumers are not likely to spend or borrow money when the economy is unstable and uncertain therefore the consumption expenditures are down. This is a particular problem for a government trying to stable or maintain stability of its economy. The United States has generally done a good job at keeping their citizens vested in their economy.
The United States is one of the greatest countries in the world with a population well over 300 hundred million citizens. It is the producer of the largest gross domestic product of the world. The primary factor contributing to this besides the market value of all final goods and services produced within a country in a given period of time is Consumer income. According to the BLS.gov (2011) “consumer income is generated through hourly wages, salary, tips, and other forms of income”. In the United States these income brackets can be divided into several classes, which include the Super-Rich (est.0.9%), Rich (est. 5%), Middle Class (majority; 46%), Working Class (est.40-45%), and the Poor (est. 12%) (BLS.gov, 2011). We as a society buy a variety of goods and services with our income resources, which contribute to the United States economy.
The graph below demonstrates an average household income for typical U.S Household. Household Income by Quintiles According to the New York Times Data| All Households| Lowest 20%| Second 20%| Middle 20%| Fourth 20%| Highest 20%| Top 5%| Households (in 1000s)| 113,146| 22,629| 22,629| 22,629| 22,629| 22,629| 5,695| Lower limit| $0| $0| $18,500| $34,738| $55,331| $88,030| $157,176| Median number of income earners| 1| 0| 1| 1| 2| 2| 2| Owner occupied| 62.4%| 49.0%| 58.8%| 68.9%| 80.5%| 90.0%| 92.8%| Renter occupied| 29.2%| 48.3%| 39.7%| 29.9%| 18.7%| 9.6%| 6.9%| Non-family
households| 31.93%| 58.92%| 40.02%| 29.96%| 19.12%| 11.64%| 9.36%| Family households| 68.06%| 41.06%| 59.97%| 70.04%| 80.87%| 88.35%| 90.61%| Married couple families| 51.35%| 19.03%| 38.89%| 51.00%| 67.05%| 80.08%| 85.59%| Single-male family| 4.32%| 3.08%| 4.64%| 5.69%| 4.89%| 3.30%| 2.47%| Single-female family| 12.38%| 18.94%| 16.43%| 13.35%| 8.93%| 4.24%| 2.54%|
Interest rates in one of the major components of why the United States economy is where it is stands today. Interest rate is the cost of borrowing money. The Federal Reserve has lowered interest rates to stabilize the economy. This is one of the fiscal policies they have applied to correct this problem. Yes, the recession of 2007 has caused for lowered interest rates in 2013. The economy has been on a downturn and one of the ways to turn this downward flow around is to lower interest rates. Applying low interest rates will help households across the states save money in addition to businesses finance new spending (“Why Are Interest Rates Being Kept at a Low Level?” 2013). Furthermore, because of the lowering of interest rates, the United States dollar is depreciating. Another policy the government has created is monetary incentives for businesses in hopes of getting them to hire more employees. This process will work however maybe not in the timeframe people want it to happen. Overall, the Federal Reserve plays a vital role in that depreciation however, it has to for the economy to recover. Unemployment, expectations, consumer income, and interest rates all have an effect on the aggregate demand and supply. For example, high unemployment means there are less people working and less money to spend, therefore there is less demand on the economy.
Additionally, unemployment could cause lower demand of labor which also effects aggregate demand and this shifts cause the aggregate demand to curve to the left. Next, expectations could increase the aggregate demand if households and businesses feel more comfortable about the stability of the economy, they will be more inclined to invest their money and make large purchases. Consumer income can increase or decrease aggregate demand simply by if a household has disposable income. Consumer expenditure is the largest factor to aggregate demand. When a household has disposable income, it is more likely the household will spend or invest those funds. If consumption increases, the quantity demanded of goods and services increases therefore the demand for supply increases. On the other hand, if consumption decreases, the quantity demanded of goods and services and supply decreases. Finally, interest rates also play a role in the possible shift of aggregate demand. The higher the interest rates are for borrowing, the less likely households and businesses will want to borrow. When interest rates increases, investments decreases and conversely, when interest rates decreases, investments increases. Unemployment, expectations, consumer income, and interest rates can have a positive or negative effect on the aggregate demand and supply.
In conclusion, maintaining a stable economy is enormous challenge that must be dealt with extreme care. The United States have created new ways of stabilizing its economy even though it was on the verge of a recession such as creating jobs for the unemployed and incentives for businesses hiring new employees. The different economic factors that affect the economy are unemployment, expectations, consumer income, and interest rates. The United States has done a good job in managing these different factors. Lowering interest rates will help the economy create revenue because consumers are more willing to borrow and spend money. The United States has incorporated these policies in effort to stable their economy. Thus far, they are the right track.
(2013). Retrieved from http://whitehouse.gov/economy
(2013). Retrieved from http://www.bls.gov/home.htm
(2013). Retrieved from http://www.cnbc.com/consumer.htm, Retrieved on 08/26/2013 (2013). Retrieved from http:/www.bls.gov/ers/unemployment
Fazel, S. (2005, Spring). Consumers’ Expectation and Consumption Expenditures. Journal for Economic Educators, 5(), 1-5. Why Are Interest Rates Being Kept at a Low Level?. (2013). Retrieved from http://www.federalreserve.gov/faqs/money_12849.htm