Aggregate Demand and Supply Models

Aggregate Demand and Supply Models

As economic advisors to the U.S. President, we have evaluated the current state of the U.S. economy. There are recommendations we have provided to improve the economy. Our recommendations include the evaluation and analyzing of four economic factors; unemployment, expectations, consumer income, and interest rates and how each affect aggregate supply and demand.

Unemployment

Unemployment recently has been a major problem in the United States. We have to get our abled workers back to work. Current information from the U.S. Department of Labor in October 2012 reports that the unemployment rate was at 7.9 percent. To help solve some of the problems with unemployment, we recommend that government provide tax cuts to small businesses. Small businesses are at a disadvantage competing against larger and more powerful businesses. Every penny earned is valuable in small business, to continue day-to-day operations. Providing a tax cut to small businesses will provide more money to invest back into the company. This creates the ability for higher production, which creates the need for more employees, therefore, creates jobs.

Outsourcing has become popular with major companies since the 90s. In 2011, "Wall Street reported major companies cut their workforce by 2.9 million people in one decade and hired 2.4 million people oversees." (Jilani, 2012). The reason major companies outsource jobs because it is cost saving and allows companies to pay lower wages in countries outside of the United States. Forcing limitation on companies outsourcing, will create more jobs in the United States. In addition, more jobs mean more people are working. Taxes paid from these people, will go back to the government, and help the budget.

Expectations

Expectations in the market affect aggregate supply and demand. People tend to make larger purchases and investments based on expectations. In housing market, investors snatched up houses in the price range of $150,000 - $250,000. Some are also snatched people looking purchase rental property or a second home. When Interest rates are low, many people start believing that the low rates are not going to get any lower and are try to catch the market before the low rates start to rise again. Another example of hoe expectations effect the market is the housing bubble burst. When the market started climbing at an enormous rate, many investors, contractors, and even people looking to get into the real estate business were snatching houses left and right in every price range, expecting to make a lot of money on their investment as the market continued to climb.

Expectations are not something that is measureable. Expectations are the consumers fancy on the current or future state of things. Consumers tend to spend more when expectations or high. Expectations are at times easy to sway, and at other times are almost impossible to sway. Expectations have a great effect on aggregate demand. Expectations rise when tax breaks are giving. Businesses tend to hire and or are more willing to give raises. This is opposite when higher taxes are forced. Businesses may start laying off workers to make up for the higher taxes.

Consumer Income

Consumer income is very important. It is gross income minus taxes and living expenses. It represents the capital a consumer would secure form of working or a business to purchase goods, services, and make investments.

Consumer income has fallen with the rise of unemployment and inflation. This slows down consumer spending which impacts the economy. The forecast calls for disposable income growth is to remain flat with 2013 possibly offering some level of wage increase. It will be interesting to see what happens as inflation, which directly to a high degree affect consumer spending.