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 ...view middle of the document...
This was driven by the new expectation that the housing industry has to regain the confidence of the consumers so that the housing demand will rise one again which will in turn cause house building to resume and build up to the level that it once was.
The automobile industry has taken a beating also in this slow moving economy, which happened as a result a fall in consumer confidence, and overproduction. Automobile manufacturers responded to the contraction in demand by cutting back on production, thereby causing layoff, car dealerships to close, and a loss in market share. In recent months, however;automobile manufacturers have restructured their organizations, with the help of the government bailout, and have resumed production and have gained some of the confidence of the consumer to start spending money again.
Consumer expectations will continue to rise, and based on one major changes that occurred in the history of the Iraqi war, all soldiers have returned home, which will result in the attitudes of the of the consumer gaining confidence in the United States economy and its ability to rise up out of any downturn and return to a prosperous economy. This will result in an increase in spending, which will in turn increase production, companies will return the workforce to their normal levels, and aggregate supply will have to catch up to aggregate demand. When these changes become a reality, all industries will benefit including the housing sector, causing the buying public to regain their confidence in the system, and therefore begin spending their money again.
Consumer Income
Consumer income has a huge effect on aggregate supply and demand just as the aggregate supply and demand can affect consumer income. If a consumer income increases, the consumer will spend more money. When a consumer spends more money, the demand for goods and services increases, and businesses have to increase production to meet the demand. When businesses increase production to meet demand, they will spend more money on raw materials and employees. This increase in spending will allow them to hire new employees, which lowers the unemployment rate. When the unemployment rate decreases, more people are earning an income to turn around and spend. “If large portion of the people in the economy suddenly decides to save more and consume less, expenditures would decrease and saving would increase. If that saving is not immediately transferred into investment, and hence back into expenditures, investment demand will not increase by enough to offset the fall in consumption demand, and total demand will fall. There will be excess supply. Faced with this excess supply, firms willlikely cut back production, which will decrease income. People will be laid off. Aspeople’s incomes fall, both their consumption and saving will decrease. (When you’relaid off, you don’t save.) Eventually income will fall far enough so that once again savingand investment will be in equilibrium,...
