Aggregate demand and aggregate supply - Essay Example

? Aggregate demand and aggregate supply due: Aggregate demand and aggregate supply Aggregate demand represents the demand for final goods and services within a nation at a specified time and price. It shows the purchasing power of goods and services of people within an economy at the given price. Aggregate supply on the other hand represents the amount of products that an economy can produce. Under normal circumstances, aggregate demand should equate to aggregate supply. The studying these concepts of aggregate supply and demand helps in understanding macroeconomics at a wider level. Policy makers within the economy must understand the concepts for the better allocation of resources. In many occasions, the government of a nation usually sustains the economy of a country using the fiscal policy. This happens on the demand side. Use of government expenditures in stimulating the economy is one of the significant activities that the government uses in stabilizing the economy. Additionally, the central bank can also stabilize the economy using the monetary policy. All these policies relate to aggregate demand and supply concepts. Thus, studying the topic will help in giving the policy makers with ideas on how to stabilize the economy. This paper will focus on the aggregate demand and aggregate supply. The writer, will analysis the topic basing on articles that discusses the topic. A conclusion, which assesses the topic basing the judgments on the articles, will follow. In most cases, the concept of aggregate demand and supply is very common within different nations and they employ various components of the concept in stabilizing the economy. The first analysis will focus on R.A Washington’s idea on “The stimulus question”, published in The Economist on February 2nd 2012. For many years, fiscal policy has formed a major subject within the political arena. People from various fields always question the advancement of the policy makers in their way to stabilize the economy. The questions rise because of the recession that affected the Americans intensely. The questions generally revolve around the significance of aggregate demand and supply in stabilizing the economy. The first inquiry is about the suitable time that the government should act to balance their budget. From the economic point of view, the government will always encounter problems in balancing the budget especially when the economy is in recession. Within this point, the revenues collected from the taxpayers reduce, as the government expenditure increases. There will be an imbalance at this point. Thus, the government will have to consider many things for the budget to balance. Putting in place various activities that will help in increasing the government revenue, the government will have to work harder on their spending, thus giving an automatic stabilization to the economy. Therefore, the balance process should be given time for it to act automatically. The second question revolved around the sustainability of government borrowing as a threat to the economy. True to the statement, too much of the government borrowing may pose a threat to the economy. The explanation behind this notion relies on the unwillingness of the private sector to lend to the government, thus affecting the economy. Contrary to the behavior of the economy, the private sectors will be affected. Since borrowing will be expensive to the private sector, the recovery process of economy will take long. An immediate stop to lending has an adverse effect to the economy of a country. The third topic inquires if discretionary fiscal policy can cause an increase in aggregate demand. Discussing this question requires many assumptions. Various economists have different ideas concerning the effect of discretionary fiscal policy to aggregate demand. In theoretical terms, the possibility is complicated, but empirically as the writer said, the policy can increase aggregate demand. The fourth question required a response if the policy makers should use discretionary fiscal policy in stabilizing the economy. Expansionary fiscal policy has an effect to the economy through the activities of the central bank. This means that the government should focus on fiscal policy during the time of crisis and recession. However, monetary policy is the best option during the recession point. The second analysis will focus on R.A Washington’s article on “Dealing with debt”, published in The economist on April 10th 2012. The writer points out the action of the IMF in releasing economic outlook affecting households and one of them is the impact of debt in recovering the economy. Washington says that the main factor that brought the Great Recession was the crashing of the asset price after a big debt boom. People always mistake that housing bust was responsible for the recession; nevertheless, the household only has a small impact to recession of a nation. Debt is the major reason. People might wonder why debt matter. According to the IMF, three dynamics have the impact connected to debt. The first dynamic diverges to two households, saver and borrower. Borrowers will always hold their spending to help maintain their balance sheets in a case of debt bust. This will lead to a fall in interest rates giving the saver an opportunity to spend and make investments. The initiative of the savers to spend and invest will help reduce the capability of the economy to enter into recession. On the other hand, a large bust will lead to a negative interest rate. The struggle of attaining a negative interest rate may cause the economy to recess followed with a weak recovery. The second dynamic relates to the fire sale feature of busts. In this feature, the asset prices fall significantly causing panic in the sale of the assets. This will cause the prices to decrease significantly, worsening the crash. The third dynamic is the effect of debt bust on inefficiencies. Under normal circumstances, a debt bust always crops-up knock-on inefficiencies. In such busts, the government should put more efforts in reducing the household debts. This will help in stabilizing the economy. Nevertheless, in a case where the struggle for the government in reducing debts destabilizes the economy, then the financial sector might run into credit crunch. Under such situations, the government may stand aside in facilitating to restructure the household debt. This arises due to the zero-sum games of such tradeoffs. According to the report, household debt usually renders the policy for stabilization ineffective. In addressing such, the writer suggests two ways. The first way is fixing the broken housing-market conduction mechanism. The government may do so by supporting the financial institutions and helping families deleverage. The second way is pushing for the stabilization of the available policy levers. In conclusion, aggregate demand and supply plays a major role in the stabilization of the economy. By the major players within the economy making use of the components of demand and supply, a nation would benefit with a stable economy. A better economy means a comfortable life with low rate of unemployment. A balanced economy would mean increase in income thus increasing the purchasing power of people for local goods, thus boost to the local industries. Work cited WASHINGTON. "Dealing with debt ." The Economist (2012): 33. WASHINGTON. "The stimulus questions." The Economist (2012): 46. Read More