Economic Depression: Fluctuations in Aggregate Demand - Term Paper Example

Order 247404 ECONOMIC DEPRESSION: FLUCTUATIONS IN AGGREGATE DEMAND Outline Thesis ment: All and sundry has anticipations concerning economic depression, but, accepted mitigations for that depression are determined by fluctuations in comprehensive demand. I. Surveillance about economic depression began about 1929 (Snowdon and Vane, 2). A. People’s misinterpretation of current economic behavior. B. The scale on outlay expenses, the recurring transformations in the competence of subsidiary resources, and unemployment had not readjusted to the economic rule of supply and demand. C. Accepted mitigations for depression are determined by fluctuations in comprehensive demand. II Research reveals economic dip is clear in GDP report. A. Depression depends on unseen margins B. Consumers spending C. Downgraded wages D. Consumption is parallel to income E. Unemployment at the lower helm of the society III Research reveals that current political turn in the United Stated States of America seems to be promising an answer to the problem. A. Stimulus package B. Regulate the fault in an economy Name: Instructor: Course, Section: Date submitted: ECONOMIC DEPRESSION: FLUCTUATIONS IN AGGREGATE DEMAND Introduction When the scale on outlay of expenses drops, the recurring transformations in the competence of subsidiary resources sinks, and unemployment sharply rises, economic depression problem began. People kept interpreting this current economic behavior as greed-oriented, but, it may not be the case. Fairly soon, anyone can figure out what has happened. When most economists from the West and Europe talk to each other face-to-face, they discussed the housing prices bubble than do Asians. The scale on outlay expenses, the recurring transformations in the competence of subsidiary resources, and unemployment had not readjusted to the economic rule of supply and demand. Apparently, the simplicity of the underpinnings of economics benchmarked overlooking its significance in the intensified global market activities. All and sundry has anticipations concerning economic depression, but, accepted mitigations for that depression are determined by fluctuations in comprehensive demand. Surveillance about economic depression began about 1929. Snowdon and Vane (2) mentioned Aldcroft (1993) and Romer (1993) who did a study on the economic conditions of the country. They discovered that somewhere between the years 1929 and 1932; the United States economy saw a dip in its business output. This was reflected in the Gross Domestic Product report, hand in hand with the sharp rise in unemployment. As Aldcroft and Romer study revealed, probably most people were not aware that trade and industry productivity degenerated; unemployment rose and contributed to the economic downturn. Body Economic depression depends on unseen margins, and those boundaries move with productivity and employment in the economy (Snowdon and Vane 2). So that the economic situation may get better or worst, depending on the nations leadership to move forward or be diffident. Snowdon and Vane supposed John Maynard Keynes in 1936 was right in his theory of employment, interest, and money. Further they said: “The implication of Keynes analysis was that government intervention, in the form of discretionary fiscal and monetary policy, could help correct such aggregate instability and stabilize the economy at full employment” (Snowdon and Vane 2). In a scenario where economic stability is lower than probable gross domestic product, it is most likely that consumers spend less (Baumol and Blinder, 588), because in reality they really do not have anything to be spent on either goods or services despite needs. Otherwise, investment spending is weak, despite abundance in supply. Where economic stability is lower than probable gross domestic product, it is only with difficulty that a jobless (Baumol and Blinder, 588) person would find one vacant position in an employment industry. Obviously, these would create a battery of unemployment within the jobseekers sector. Conversely, employers will not have the same trouble because of the exigency for jobs (Baumol and Blinder, 588). However, assuming employers would be successful in their production of goods or services, patronage and sales are subsequent questions. Productivity and profit can only be accounted for when there are sales (Taylor, 188). In the case of marginalized job opportunities, where the majority of consumer populace belongs, the populations’ purchasing power are also marginalized (Taylor, 862). The employers’ sector can always opt to downgrade wages of employees to accommodate more jobseekers, but this will only most likely worsen the situation (Baumol and Blinder, 588). Clearly, consumption is parallel to income as well as GDP (Taylor, 862). Below, a table illustrated by the same author show consumption function in US: Consumption Function (Billions of dollars) Consumption Income 1,600 1,000 2,200 2,000 2,800 3,000 3,400 4,000 4,000 5,000 4,600 6,000 5,200 7,000 5,800 8,000 6,400 9,000 7,000 10,000 7,600 11,000 8,200 12,000 8,800 13,000 9,400 14,000 Source: Taylor, 861 Based on the figures reflected on the table above, Americans spend more as their income increases. That is at an income of US$1,000 billion, their consumption is within US$1,600billion. But, when the income increased to US$2,000 billion, their consumption rose to US$2,200. It can be clearly noted that for every billion dollar rise in income, increased consumption was at about six hundred million dollars. Also, consumption is revealed to be quite higher at lower income levels than those in the higher income levels. In other words, this projects borrowings by low income earners to satisfy requirements for consumption (Taylor, 861). Besides, not every income goes to consumption. There are other expenditures like interest rates, taxes (Taylor, 863), health care insurance premiums, and social security premiums. On the other hand, looking at the privileged echelon of earnings, Americans who belong to this category would have better chances of spending without borrowing, and saving plus investing (Taylor, 863). This is certainly the ideal level that every economy strives to achieve. It would then be safe to assume that by and large, the propensity of every individual to spend for consumption is dependent upon their income. So, in an economy where aggregate demand is low, for example the sudden drop in purchases of basic goods and services like food and energy, it can be said that this is the effect of low income due to unemployment at the lower helm of the society, inasmuch as most spending or high consumption expenditures are with the lower income level. Nedra and Terence in fact mentioned 10.1 million Americans are jobless. The next question would then be, does society have a mechanism to stabilize fluctuating demands to arrest economic depression? The current political turn in the United Stated States of America seems to be promising an answer to the latter question. President –elect Barak Dunham Obama guaranteed to undertake economic measures to resolve the problems of unemployment, gone savings, and banks foreclosed homes (Nedra and Terence). This is projected to be done with a now becoming familiar strategy in an economy threatened with depression, a stimulus package for the society (Nedra and Terence). The designed stimulus packaged would extend ‘jobless benefits, food aids to the poor, Medicaid funds, and dollars for public works projects’ (Nedra and Terence). This is obviously an effort to increase consumption despite joblessness and thus minimize the impact of disparity between supply and demand of goods and services largely influenced by the lower level of society, if not the so called middle-class. Practically, the current designed effort to regulate the fault in an economy in recession would somehow leverage the slow, but, certain movement in aggregate demand (Baumol and Blinder, 589). Otherwise, the economy would get stuck in the crack and suffer prolong period of lower than potential GDP (Baumol and Blinder, 589). Conclusion Economic depression can be mitigated by marginalizing fluctuations in aggregate demand. Marginalizations of vacillations of aggregate demand are usually and efficiently done with political, governmental policies such as stimulus packages. Bibliography Baumol, William, and Blinder, Alan. 2001. Economics: Priciples and Policy. 8th ed. London: Harcourt Inc. DArge, Ralph C., Richard B. Norgaard, Mancur Olson, and Richard Somerville. "Economic Growth, Sustainability, and the Environment." Contemporary Policy Issues 9.1 (1991): 1-23. Pickler, Nedra and Hunt, Terence. Obama to center stage, promises action on economy. AP. Contributors: Hunt, T. and Davis, J. H. http://news.yahoo.com/s/ap/20081108/ap_on_el_pr/obama rets: 11/8/08 Snowdon, Brian, and Howard R. Vane, eds. Reflections on the Development of Modern Macroeconomics. Cheltenham, England: Edward Elgar, 1999. Taylor, John B. Economics. 5th ed. Geneva: Houghton Mifflin Company. 1999. Read More