Aggregate Demand and Supply Models

ECO/372 – Aggregate Demand and Supply Models

The current U.S. administration has implemented a fiscal policy that promotes accelerated growth of the economy, expands opportunity for Americans, while at the same time maintaining fiscal responsibility.

In order to accomplish these goals, government leadership is backing investment in infrastructure, job driven training, tax breaks for the working class, while maintaining fiscal responsibility by reforming health care, taxes, and immigration reform (“Office Of Management And Budget”, 2014).

Current Economic Factors

Although the unemployment rate is lower and is the lowest it has been since 2008, the jobs that were replaced in the recession are lower paid jobs. Even as unemployment rates slowly decline, the demand for higher paying jobs has increased.

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As expensive as it is to live in today’s economy, potential employees must pursue all opportunities to advance their career in their chosen occupational field by all means. This may include some of today’s workforce going back to school and getting valuable on the job training to find employment or gain promotions from within an organization.

The expectation of typical Americans is that there should always be work available so people can pursue their avenues of dreams and needs. When the economy went into a recession recently, people started to panic and proclaim that the American dream had withered away.

In this scenario, people become more aware of spending money, so they spend less to keep their best interests at hand. This stunts economic growth and progress, which is the very thing that drives the heart of the economy.

One of the most important economic factors is consumer income, because people want to be able to afford to do the things they need and want. It seems that bills and other tangible items increase but the money that is flowing into the hands of the consumer is not increasing the way it should be.

This impact is largely driven by corporate greed and this is one of the reasons why the middle class is getting smaller and smaller and the gap between the upper class and the middle and lower class is getting bigger and bigger.

In December 2008, the United States had the lowest interest rate in its history at .25 Percent (“Us Interest Rate”, 2014). The point of low interest rates is to expand the economy and limit inflation by giving the consumer the flexibility to not get overwhelmed by debt.

In regards to the housing market debacle, a large number of consumers would buy a house with what they thought was a fixed interest rate, but they were mistaken. Additionally, the laws that were put into effect to prevent the consumer from being taken advantage of were repealed, like the Glass-Seagull Act.

These were laws for banks to abide by, giving the America people the ability to prevent another economic downturn. After the recession the entire housing market was restructured to prevent this from occurring again in the future.

Impact of Current Economic Factors

The existing effects of the economic factors have created an upward trend in the economy, with respect to unemployment, consumer expectations, consumer income, and the current interest rates. Proving the aggregate supply and demand to be positive. The unemployment rate at 6.2 is the lowest it has been since 2008.

In 2009, the unemployment rate hit 9.5 and stayed at that level for two years (“Data Bases, Tables and Calculators by Subject,” 2014). High unemployment rates cause low levels of consumer confidence. On the contrary, lower unemployment rates create an expectation of a good economy. The expectation allows people to feel confident in spending their surplus income rather than saving it.

Because the consumers are feeling confident and therefore spending more money, companies are creating more products and in turn more jobs. Incomes increase as people return to work, and others are promoted. Thus far we have only seen a 2% increase in the labor forces and household income (“Survey of Consumer expectations,” 2014).

In order to balance the economy in 2008, companies used a method known as the Keynesian AS/AD model, resulting in the highest potential output reduced in order to accommodate a shrinking market.

With lower unemployment the production will be increased to standard output. Just as shrinking the output results in loss of jobs, increasing the production will bring those jobs back. Another way the Government helps to slow the economy downturn is through lower interest rates.

As with the output, it makes sense that the Feds will now raise the interest rates, because of the reported consumer confidence. However, the Feds decided to hold off and give the economy more time to recover (Robb, 2014).

Current Fiscal Policy

Stronger economic growth is fueled foremost by an ambitious four-year $302 billion dollar transportation reauthorization proposal charged with creating jobs and improving transportation options for wage earners.

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Investment in a national network of 45 manufacturing institutes aims to further economic growth by strengthening the U.S. manufacturing base, and encourage innovation.

The inclusion of a new research and development tax credit by the administration additionally spurs growth by supporting the creation of new technologies, including research that will help to protect the environment and fight disease (“Office Of Management And Budget”, 2014).

Expanded opportunities for Americans are led by the policy of cutting taxes, such as the doubling of the amount of Earned Income Tax Credit for workers who do not have children. This expansion to the EITC is favored due to the success of the policy’s existing ability to reduce poverty by encouraging citizens to enter the workforce.

Job training programs geared toward investing (or government spending) in the growth of skilled labor that meets the needs of employers, is an important policy that furthers opportunities for wage earners and businesses alike (“Office Of Management And Budget”, 2014).

Increased taxpayer funded policies requires maintaining fiscal responsibility. The Affordable Care Act is a measure that reforms a large part of the U.S. economy, with the goal of reducing health care costs while at the same time improving the quality of care.

Tax reform further enables fiscal responsibility as described by “Office Of Management And Budget” (2014), “Pro-growth tax reform curbs inefficient and unfair tax breaks that benefit the wealthiest, and ensures that everyone is paying their fair share.”

Immigration reform policies are also important and focused on fixing the existing immigration system, which economists agree will grow the economy and shrink deficits (“Office Of Management And Budget”, 2014).

Fiscal Policy Effectiveness

Fiscal policy effectiveness is dependent on how each policy is evaluated and from which economic viewpoint. There are two main types of economists. The first type of economist is the Classical economist. Classical economists “are economists who believe that business cycles (ups and downs of the economy) are temporary glitches, and who generally favor laissez-faire, or nonactivist, policies” (Colander, 2013, p. 527).

On the contrary, “Keynesian economists are economists who believe that business cycles reflect underlying problems that can be addressed with activist government policies” (Colander, 2013, p. 528). The United States fiscal policy closely resembles one of these views and it will be evaluated in the following sections.

The current U.S. fiscal policies do not closely resemble the classical economist’s beliefs. There are traces of classical views in the current U.S. fiscal policy like the increase in manufacturing investments. Manufacturing investment would increase the amount of manufacturing jobs created in the U.S. and the result would be a boost in the economy fueled by individuals who are hired by these manufacturers.

This increase in investments is, of course, being fueled by government and in direct contrast to the classical economist’s views. Although the economy may right itself with manufacturing industry growth the government is ultimately stimulating it. Therefore, according to a Classical economist, the fiscal policy would be less than effective because it is dependent on government activist’s intervention.

The fiscal policy set forth by the United States government is a much better example of Keynesian economics than Classical economics. According to the Keynesian model, the fiscal policy of the United States is very effective. Economic growth is being stimulated by government actions such as research and development tax credits, tax reforms, and immigration reform.

Through a Keynesian economist’s eyes, government intervention is the effective way to boost economic growth. The U.S. government’s involvement with the economy is paramount. If the government did not intervene in economic affairs then the economy could suffer a downturn. The downturn would be caused by the citizen’s hesitation to spend in a time when spending is most needed.

The lack of spending could create situations where corporations need to lay off employees because of a lack of product or service output. Ultimately, the fiscal goal of the United States government is to put more money in the consumer’s pocket so they will be willing to spend more, thus generating economic growth.

References

Colander, D. C. (2013). Economics by McGraw-Hill Education

Data Bases, Tables and Calculators by Subject. (2014, August). Bureau of Labor Statistics, Retrieved from http://data.bls.gov/timeseries/LNS14000000

Office of Management and Budget. (2014). Retrieved from http://www.whitehouse.gov/omb/budget

Robb, G. (2014, August). Market Watch. The Wall Street Journal.

Survey of Consumer expectations. (2014, July). Microeconomic Data, Retrieved from Microeconomics (The Mcgraw-hill Series in Economics) by McGraw-Hill Education

US Interest Rate. (2014). Retrieved from http://www.tradingeconomics.com/united-states/interest-rate

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