Aggregate Demand and Supply Models
OPTION 2: ECONOMIC CRITIQUE
October 1, 2012
Option 2: Economic Critique
The aggregate demand and supply model (AS-AD Model) is an economic model that has the capabilities to account for business cycles of expansion and recession, and helps to model macroeconomic policy. Aggregate demand is the total demand of goods and services for a specific period of time. Aggregate supply is the total supply of goods and services at an overall period of time (Colander, 2010). The aggregate demand and supply model seeks equilibrium. For example, when the aggregate demand is higher, it will move the economy to equilibrium with higher levels of output and price levels. This model is used to predict quantity of goods and services preformed, and to predict the average price level. This model allows economist to make economic predictions about unemployment and the GDP (Colander, 2010). Unemployment
Unemployment is defined as people over the age of 16- who are looking and willing to work, but they are currently out of a job. The United States Department of Labor’s Bureau of Labor Statistics (BLS) currently reported that employment in August rose by 96,000, which caused the unemployment rate to drop from 8.3% to 8.1% (2012). The BLS also reported that the United States long-term unemployment accounts for five million individuals, which is 40% of the unemployed. The number of individuals employed part-time because of economic reasons, also referred to as involuntary was reported at eight million individuals in August (Bureau of Labor Statistics, 2012). There are two policies for which unemployment can be reduced from an economic standpoint; they are fiscal policy and monetary policy. Fiscal policy is when government steps in and minimizes taxes and expenses that maximize the aggregate demand. The disposable income will then increase and essentially will create increased consumption. The monetary policy is when government lowers interest rates, which will also increase consumption. Economic factors such as unemployment are a result of a change in the aggregate demand and supply model. An increase in GDP will decrease unemployment. For example, when the demand for consumption increases the demand for workers will also increase which will result in lower unemployment. There are a few fiscal policies that have been recommended by government officials. One of the policies is to keep interest rates low. By keeping interest rates low, the government is anticipating an increase in consumption, which will help to stimulate the economy. Another example is when the Federal Reserve provided quantitative easing when they offered the Bank Bailout. The Federal Reserve, which is the Federal Open Market Committee (FOMC) met last week to discuss an open ended quantitative easing policy. The FOMC believes it can satisfy its price stability mandate, which should keep the federal funds rate extraordinarily low (Mauldin, 2012). The balance sheet of the Federal Reserve is now reported at a mind-blowing 1.5 trillion dollars. Bernanke proposed to raise the 1.5 trillion dollars every year until the United States reaches an acceptable rate of unemployment, achieved in a context of price stability. Some argued that although Bernanke argued many years ago for a 2% inflation target, there has been no real line in the sand regarding what the current target should be and what is an acceptable rate of inflation in an age of very high unemployment (Mauldin, 2012). This Keynesian approach is much different from the classical model perspective. The Classical model approach is to do nothing. The classical model’s perspective is that the only way true involuntary unemployment can exist is if something gets in the way of market forces. An example is legal minimum wage. This factor can influence the market by placing legal restrictions on...