Aggregate Demand and Aggregate Supply Models - Assignment Example

Aggregate Demand and Aggregate Supply models Part one Effect of Consumer Confidence index rise and retail sales increase on equilibrium price level and real GDP An increase in the consumer confidence index would mean that consumers (citizens) would be willing to spend more of their money on available products. This would shift the Aggregate demand curve to the right, and consequently the level of equilibrium price would increase (Kaufman & Kaufman, 2001). An increase in the retail sales would mean that suppliers (or manufactures or producers) would have more money for additional investment (such as increase production rates and open new businesses among others). This trend would shift the Aggregate supply curve to the right, and consequently the real GDP would increase, while the equilibrium price levels would go down (Kaufman & Kaufman, 2001). Effect of contraction of economies of our major trading partners on equilibrium price level and real GDP Contraction of economies of the major trading partners would mean that both foreign demand and supply would reduce. Decrease in foreign demand would shift the aggregate demand curve to left, and consequently both the GDP and price levels would reduce (Kaufman & Kaufman, 2001). Decrease in foreign supply would shift the aggregate supply curve to the right since local industries would produce more in trying to cover the deficit caused, and consequently the real GDP rise and price levels would fall. Effect of decrease of government spending on equilibrium price level and real GDP Decrease in government spending would lead to increase in the rates of unemployment, therefore, some citizens would not be able afford certain goods and services. This would shift the aggregate demand curve to the left, and consequently both the GDP and price levels would fall (Kaufman & Kaufman, 2001). Decrease in government spending would also mean that goods supplied to government agencies would reduce. This would shift the aggregate supply curve to the left, and consequently the GDP would decrease, while the price levels would increase. Effect of workers inflations expectations and negotiations of wage increase on equilibrium price level and real GDP Inflation expectations and wage rise negotiations by workers, would lead to increased spending by the citizens. This would shift the Aggregate demand curve to the right, and consequently the level of equilibrium price and real GDP would increase (Kaufman & Kaufman, 2001). Effect of technological improvements increase productivity on equilibrium price level and real GDP Technological improvements would lead to an increase in the production rates due to increased production efficiency. This would shift the Aggregate supply curve to the right, and consequently real GDP would increase (Kaufman & Kaufman, 2001). However, the level of equilibrium price would decrease. Part two The basis of Keynes’s argument in supporting public spending According to Keynes, economic depressions are usually caused by people’s reluctance to spending; that is, people choose saving to investment, and it is caused by the citizen’s lack of investment confidence (O'Driscoll, 2010). Further according to them, if money is saved there is no guarantee that the money will be invested. Therefore, in order to counter for the deficits caused by lack private spending, Keynes proposed enhancement of public (government) spending (Papola & Roberts, 2010). Hayek’s greatest disagreement with Keynes arguments The greatest disagreement was about the benefits that would be associated with government spending which was usually financed by public debts (O'Driscoll, 2010). Hayek argued that the existence large public debts would impede economic recovery more as compared to deficits associated with private debt. Therefore, according (Hayek) to them public spending as suggested by Keynes would not enhance economic recovery. AS/AD model illustrating and explaining Keynes’ solution to economic problems in 1932 Increase in government (public) spending would lead to increase in the rates of employment, therefore, more citizens would not be able afford goods and services (Papola & Roberts, 2011). This would shift the aggregate demand curve to the right (from AD1 to AD2), and consequently both the real GDP would increase. Producers would respond to this increase in demand by producing more and/or increasing prices of product. This would shift the aggregate supply curve to the left (AS1 to AS 2), and consequently the price levels would increase (O'Driscoll, 2010). This trend would the economy back to recovery. AS/AD model illustrating and explaining Hayek’s solution to economic problems in 1932 According Hayek economic depressions can be countered by enhancing global trade (that is, by removal of trade barriers). Removal of trade barriers would increase both foreign supply and demand. Increase in foreign demand would shift the aggregate demand curve to right (AD 1 to AD 2), and consequently the real GDP would increase (Q 1 to Q 2). Increase in foreign supply would shift the aggregate supply curve to the left (AS 1 to AS 2), thereby increasing the equilibrium price level (P1 to P 2). The Use of AS/AD model to explain and illustrate how President Obama’s policies would solve the problems in the macroeconomic Obama’s policies were geared towards encouraging private investment whose deficiency, according to Keynes’ arguments, brings about economic recession (O'Driscoll, 2010). Increase in private would shift the aggregate supply curve to the right (AS 1 to AS 2), thereby increasing real output and the country’s real GDP (P1 to P 2). The alignment of President Obama’s policies to Keynes’ arguments According to O’Driscoll, Obama’s policies are closely aligned to Keynes’ arguments. The policies of President Obama are geared at encouraging private investment (O'Driscoll, 2010). According to Keynes, it is fear of public investment that has brought about by lack confidence that brings about economic depression. Therefore, according to Obama, an increase in private investment would lead to an increase avert the economic depressions. References Kaufman, D., & Kaufman, R. (2001). Aggregate demand and Aggregate Supply model. Retrieved March 27, 2013, from Think Economics: http://www.whitenova.com/thinkEconomics/adas.html O'Driscoll, G. P. (2010). Keynes vs. Hayek: The Great Debate Continues. The Wall Street Journal. (Eastern edition)., A.17. Papola, J., & Roberts, R. (2010). Fear the Boom and Bust. Retrieved March 27, 2013, from Youtube: http://www.youtube.com/watch?v=d0nERTFo-Sk Papola, J., & Roberts, R. (2011, April). Fight of the Century: Keynes vs. Hayek Round Two. Retrieved March 27, 2013, from Youtube: http://www.youtube.com/watch?v=GTQnarzmTOc Read More