Aggregate Demand and Supply Models Essay Sample

Aggregate Demand and Supply Models Pages
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The economy in the United States has been trying reestablish itself by creating an economic stability by deriving a plan to get unemployment down, encouraging consumers and producers to put back into the economy, and that the current fiscal policies are written to stabilize the economy.

The United States economy is based on a balance of making money, spending money, investing money, and trading money. Unfortunately, in the United States the unemployment rate has dropped to 5.50% in February 2015 from 5.70% in January 2015. Unemployment is measured by the number of people unemployed by the number of people who still work divided by last year’s figures. Consumer and Producer Expectations complement each other in a way that, if the producers are not producing a product that the customer will buy or want, then the producer will be out of business. Consumer income also has a hand in our economic growth. Consumers use their monthly revenue to purchase wants after all their needs are paid for.

The extra money consumers put back into the economy help generate jobs for those employees and helps push goods. Interest rates are typically calculated on an annual basis, determined by annual percentage rates. Interest is best described as a borrowed asset like a large asset, cash, vehicle, building, or, etc. When a borrower is a low risk party, their rates are usually lower than those who are high risk. The current fiscal policies are tax and spending policies of the federal government. The fiscal policies are made by Congress and the Administration and determine the effectiveness of the current fiscal policies. Unemployment

We all know that maintaining a stable economy can be very difficult for any nation. If a nation has the ability and willingness to change and create new ways of maintaining their economic levels, the economy will thrive better. One of the four main factors that affect aggregate demand and supply is unemployment (Colander, 2010). A great place to look into unemployment statistics is the U.S. Department of Labor. According to the Bureau of Labor Statistics, anyone who is 16 or older, was unemployed during the reference week, was physically and mentally able to work except for temporary illnesses, and made an effort to find a job for the month is included. Anyone waiting to be rehired after being laid off is still considered unemployed (US Department of Labor, 2015). As of February 2015, we are currently at 5.5% unemployment rate with over 320,000 Unemployment Insurance Initial Claims.

This is amusing because the Cleveland Federal Reserve predicted in 2013 that the percentage would stay above 5.7% (Amedeo, 2013). The recession was causing the rate of unemployed citizens to rise, but this is a long term problem that, unfortunately, does not have a short-term solution. If this continues, many of the unemployed persons will have skills that do not match the current market. That is why it is so crucial for people to be willing to learn. According to the Economic Report of the President, in 2015, 10,280 were unemployed at the beginning of the year and only 8, 688 by the end of the year. Over 5,000 people lost their jobs, but only 996 were layoffs and the rest were for other reasons. The total number of individuals who left their jobs willingly was 815, re entrants-2,911, and new enterance-1181 and the duration of employment was about 33 weeks (Furman, 2015).

Consumer and Producer Expectations
Consumer expectation refers to the wants and needs of consumers in the economic marketplace. Most of these expectations are derived by preconceived notions regarding services and goods. Consumers purchase one thing over another in order to meet their needs. Consumers usually have high expectations for products and services purchased. It is said that if consumers save more money and spend less, our economy will suffer. Demand is driven by the satisfaction consumers receive from consuming services and goods. When consumer wealth increases, they demand more services and goods. When wealth decreases, less goods and services are demanded causing a strain in economic growth. If a business sells fewer products, less money will be generated. This will cause changes in labor and employee wages. Overtime, this will essentially put a strain on the business as a whole. If a business sells more products, its overall wellbeing will increase and create a stable environment. Higher interest rates will discourage consumption.

Consumers expect to get the most for their hard earned money. Producers spend time focusing on consumer expectations in order to influence consumer purchasing decisions. Producers sell goods at the highest price possible. If a price increase is expected in the future, they will sell it for a little less. If prices are expected to decline, they will sell as much of an item as they can. Changes in seller expectations cause shifts in the supply curve. The amount of services and goods produced are based off of consumer needs and wants. It is important for businesses to pay close attention to what consumers want and need in order to keep them satisfied and keep the business going strong. Say’s law states that it is supply that drives the economy, not demand. Producers expect to sell products and services in order to gain profit, while satisfying consumer needs, and remaining financially stable.

Consumer Income
Consumer income is the amount of income left over after taxes, and living expenses have been deducted from wages. The remaining amount of money is what a person has to spend, save or invest. The economy is kept afloat by what the consumer can spend on products and services. If the consumer does not have the extra revenue to put back into the economy, then business workers cannot keep their doors open. Any additional income the consumer has to spend will be spent with the greatest of care. The customer will find a product of service needed and price match to find the most cost effective way to get the service or product desired. When the prices of goods and services are on the rise, consumers find ways to avoid spending all their extra money and find solutions to get the things they need or want.

Interest Rates
Cost changes aggregate demand and supply. Therefore when considering the United States economy, the interest rate needs to be considered. The Federal Open Market Committee (FOMC) meets multiple times each year to decide the federal funds target rate. (“”, 2015) This federal funds target rate is the interest rate that lending institutions borrow money from each other. The federal funds target rate has maintained constant since December 16, 2008 when it was set as 0% to 0.25%. (Board of Governors of the Federal Reserve, n.d.). The United States prime interest rate is a basis used by most banks to set interest rates for the public. The prime interest rate is calculated as the federal funds target rate plus three points. Since the federal funds target rate has not changed since December 16, 2008; the prime interest rate has also remained constant at 3.25%.

This is the percent of interest charged to borrow money. As the interest rate goes up, it costs more to borrow money both for the lending institutions, as well as the general public. Significant purchases such as cars and houses will slow down as the interest rates go up slowing the demand for goods and services. When the economy is in a recession or recovering from a recession, the United States government will keep interest rates low to encourage people to purchase. When the demand goes down, the supply will go up as there are fewer purchases being made and thus causing the prices to drop. Current Fiscal Policies

Some current economic policies recommended by our government leaders are things like wider use of dynamic scoring that could potentially introduce uncertainties into the monetary policy and potentially degrade the value of the present analysis. Dynamic scoring could assume that low tax rates boost growth, which can offset lost revenue. The Presidential spending is 29% discretionary spending, which is the amount that goes through the appropriations process every year. That’s 1.16 trillion dollars that he is handing to Congress for discretionary programs.

It comes out to be 6% education, government, and veteran’s benefits, 5% housing and community, Medicare and health, social security, unemployment and labor, 3% energy and environment, international affairs, and science, and finally 2% for transportation, 1% for food and agriculture, and 55% to the military. 6% Interest on Federal Debt, and 65% on Mandatory Spending which includes Medicare and health at 39%, food and agriculture at 4%, transportation at 3%, veterans’ benefits at 4% and 50% for social security, unemployment, and labor (Furman, 2015). Based on the 2015 Economic report from the president the economy is recovering from the recession. Should the country rely on the governments help to improve the economy?

Keynesian and Classical Perspectives
From a Keynesian perspective, this is effective due to government intervention and the approach that the president has taken to improve the economy. The sharp drop in unemployment in 2014 came amid stabilization in the labor force participation rate and the strongest annual job growth since the 1990s as businesses added more than 3 million jobs (Jason Furman, 2015). With the economy improving people will spend more money and production will increase this will increase the aggregate demand raising the potential output. As businesses increase their production, the unemployment rate will continue to go down. As the unemployment goes down people will increase their spending and start saving more. This will in turn make it easier for investing.

Companies invest more money to increase production and hire more people. This will begin an upward spiral that the country needs to keep improving the economy. In a Classical economic perspective government spending does not play a large role in the economy. Businesses and consumers play a significant role. In this point of view, it is believed to do nothing. That it will work itself out if companies keep producing, then the customer will keep buying. Classical economist believes that there is an invisible hand that will help the economy out. The unemployment rates will fix themselves and that the government should only intervene when there is a market failure or that they can follow policies that will lead to improvements. Conclusion

As the unemployment rate is tended too, the economic growth of the country tries to reestablish job security for the people. The current fiscal policy is a guide to help control cost, set budgets, and eliminate areas that are costing the economy more money than it should. The plan should also encourage consumers and producers to spend money to produce and buy items that will help stimulate the economy. Prices on goods will be less expensive, and consumers will likely spend more. Interest rates on big purchases will be lower and, as a result, easier for the consumer to purchase will be more straightforward to obtain.


Amedeo, K. (2013). US Unemployment rate. Retrieved from

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

Furman, J. (2015). 2015 Economic Report of the President. Retrieved from

US Department of Labor. (2015). Bureau of Labor Statistics. Retrieved from Labor Force Statistics from the Current Population Survey:

Board of Governors of the Federal Reserve System. (n.d.). Retrieved from (2015). Retrieved from

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