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Week 3, Learning Team – Aggregate Demand and Supply Models – Economic Critique Essay

An Economic Critique of Aggregate Demand and Supply Models
The recent fall of the United States economy has created a society of fear, insecurity, and doubtful investors, retirees, and consumers world-wide. Economists from around the world have come together to solve world-wide economic issues and bring stability back to businesses, households, and the government. Economics teaches you how to approach problems; it does not provide what is right or what is wrong, nor does it provide you with a definitive answer. Consistent evaluation of economic factors like unemployment, economic expectations, consumer income, and interest rates, can prove to be highly effective. Unemployment Rate

The unemployment rate steadily has declined over the last three years; there was a difference of 1.6% from July 2011 to July 2013. In July 2011 the unemployment rate was at 9% while in July 2013 it was reported at 7.4% so there was a decline of 1.6% (Bureau of Labor Statistics: The Employment Situation, 2013). The unemployment rate lowering over the last three years has been a positive thing for the United States economy because it means more jobs were created in 2013 and thus more people are working. The positive upturn in the unemployment rate would means that the household income has increased and there is more spending money power available. Even though there is some positive feedback in the unemployment rate numbers there are still other issues that affect the economy and still need to be dealt with like the government budget cut, which could produce more businesses taxes. The economy is on a slow but steady up-swing do to job creations, which has caused the unemployment rates to lower for the last three years. Some job markets have created new jobs like the retail and service market but other have not improved at all like the manufacturing and health care markets. The important thing is that there are more jobs being created and the unemployment rate is lowering. Expectations

In the current economy, many Americans are concerned that a rebound is still many years away. The hope and expectation appears to be that a new Presidential administration will help turn the tide on the depressed
economy. However, expectations do not appear to be overzealous as Americans still witness home foreclosures, job layoffs, bankruptcies, and an increase in requests for public assistance. The average American still seems to be overwhelmed with these economic issues, whether on a personal basis or among friends and family. There are numerous factors affecting consumer income during the current economic recession. The aggregate demand effects are the Keynes’ interest rate effect and the Mundell-Fleming exchange-rate effect. It is often mentioned that the aggregate demand arch is a sliding slope, since the lesser price levels, a greater amount is required. These factors are the existing factors on aggregate demand and supply. The Obama administration has a few strategies to join our economic growth and our fiscal prospects by stimulating a sound profitable recovery, taking initiative toward bringing down the deficiency and placing a foundation and contain health care costs. “Experience suggests that the tough choices that are necessary to put the budget into what economists call “primary balance” – a situation where taxes and expenditures cover each other, excluding interest payments, or what is essentially equivalent, a situation where the debt-to-GDP ratio can stabilize – will require the cooperation of both political parties. Experience suggests that achieving this kind of cooperation will require deliberation outside the immediate cut and thrust of political debate (“Reflections on Fiscal Policy and Economic Strategy”, 2010). The Keynesian perspective is often focused on immediate results in economic theories. Policies focus on the short-term needs and how economic policies can make instant correction to a nation’s economy. “Classical economics focuses on creating long-term solutions for economic problems. The effects of inflation, government regulation and taxes can all play an important part in developing classical economic theories. Classical economists also take into account the effects of other current policies and how new economic theory will improve or distort the free market environment (“Differences Between Classical & Keynesian Economics”, 2013). Consumer Income

As of June 2013, median household incomes were up $598 month-over-month and $960 year-over-year. According to U.S. Department of Commerce (2013), “wages and salaries, the largest component of personal income, increased 0.5
percent in June after increasing 0.3 percent in May.” Personal expenditure is the vast element to aggregate demand. It is set on a household’s disposable income. There will be a shift to the left on aggregate demand if consumers buy more output at the price level. The current fiscal policy in place as it relates to consumer income states that the government can increase or decrease taxes on household income. An increase in taxes means a decrease in disposable income, because it will take money out of households. The opposite holds true if there is a decrease in taxes, because it will leave households with more money. Disposable income accounts for two-thirds of total demand. Economist had forecast a 0.1% rise, but reports show that spending fell 0.2% in May 2013 when adjusted for inflation. It is suggested that consumers pulled back from spending due to a weak income data.

During periods of recession, the Keynesian theory recommends that Congress should increase government spending and decrease taxes to give households more disposable income to purchase more products, simultaneously. Through these methods of fiscal policy, the rise in aggregate demand stimulates businesses to increase production, employ more workers, and increase household incomes, enabling them to buy more. The classical theory concept known as “free market” requires little to no government intervention. This allows consumers to act in their own self-interest in regards to economic decisions. In the current issues regarding consumer income, Keynesian theory has been proven effective as shown in the increase of income and the shift in aggregate demand. If the current state of the U.S. consumer income remains on course, there should be a steady climb household disposable income. Interest Rates

Based on my finding, as an international reporter, it was disclosed that interest rates have been the primary macroeconomic indictor of our economy today. It is an aggregate figure that represents how the present banks and financial sector operate on a national and regional economy level. So what is an interest rate, According to Colander (2010), Chapter 13, “Interest rates — the prices that are charged or paid for the use of a financial asset —are key variables in the financial sector.” It’s the rate of the cost of borrowing money, which reflects both the supply and demand of United States
currency at a particular time. Therefore, after critiquing the current state of the U.S. economy interest rate, it was uncovered that monetary policy plays a major part in the decision making. This is why, According to Colander (2010), Chapter 13, “Money is a highly liquid financial asset that’s generally accepted in exchange for other goods, is used as a reference in valuing other goods, and can be stored as wealth.” It’s the Federal Reserve that uses the supply of money to regulate the current interest rate, which affects the cost of borrowing money to regulate the economy. According to Colander (2010), Chapter 13, “Federal Reserve Bank (the Fed) — the U.S. central bank whose liabilities (Federal Reserve notes) serve as cash in the United States.” Therefore, borrowing money is really known as interests’ rate that is set by the Federal Reserve that affects the rates on credit cards and home mortgages. In this current state of the U.S. economy, it has affected the interest rate and the exchanged rate; this is where the Fiscal policy has become a major factor. This policy has macroeconomic implications beyond consumer spending. In fact, when the government runs a deficit, it has to borrow from investors by issuing treasury bonds. Therefore, when the government competes with others borrowers, such as corporation, or consumer saving this will affect the raising of the interest rate. So in result, this policy recommendation should be setting interest rate sufficiently to attract investors and their money, so the government can have the cash to cover the budget deficits. Conclusion

In conclusion, the economy plays an important role in all the markets and sectors whether it is with the government, households, or businesses. Each sector or market affects the other since it is a never ending cycle that affects job creation, consumer, and business spending power, and government spending. Economists study to prevent recessions and keep our economy on a positive cycle with continuous growth and spending power. In order to do this, businesses, government, and household need to continue spending to provide jobs for people. The people in turn will continue spending providing more money spending power. The government needs to analyze situations to prevent financial crisis and have ways to strength our economy (Colander, 2010). Everyone needs to play their part for continuous growth
and prosperity.

U.S. Department of Commerce. (2013). Personal income and outlays, June
2013. Retrieved from http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm Bureau of Labor Statistics: The Employment Situation. (2013). Retrieved from http://www.bls.gov/news.release/pdf/empsit.pdf Colander, David. C. (2010). Macroeconomics (8th ed.). Retrieved from The University of Phoenix eBook Collection database. Reflections on Fiscal Policy and Economic Strategy. (2010). Retrieved from http://www.whitehouse.gov/administration/eop/nec/speeches/fiscal-policy-economic-strategy. Differences Between Classical & Keynesian Economics. (2013). Retrieved from http://smallbusiness.chron.com/differences-between-classical-keynesian-economics-3897.html

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