Economic Advisement Paper: Option 1
September 15, 2014
The United States economy is currently recovering from a recession that occurred in 2007. While this society is on a steady incline to forget what happened, it was a traumatic time for many Americans. As economic advisors, it is critical to evaluate factors such as unemployment, expectations, consumer income, and interest rates. By analyzing these elements, we are able to determine how each affects aggregate supply and demand. We also developed a set of recommendations for the U.S. president regarding government spending and taxes based on the economic factors’ current state. This will help to better understand all ...view middle of the document...
Normally there is a negative relationship between aggregate demand and the price level."
Unemployment is another factor that could reduce the supply of labor in the economy (as unemployed people become discouraged and stop looking for jobs). This, again, would shift the aggregate supply curve to the left. Also employers may use the threat of unemployment to cut wages. People in general would be more desperate for a job and be willing to work for less. There is then an excess supply, which is reduced by closing factories and further increasing the number of unemployed.
Consumer income refers to the amount of income remaining after taxes, and cost of living expenses have been deducted from an individual’s wages. (Businessdictionary.com, n.d.) Economists have struggled to understand what factors have the most influence on consumer spending. Economic experts say consumer confidence makes up approximately two-thirds of the aggregate demand based on changes, buying, spending trends, and economic conditions, (Scheid, 2010).
High gas prices, interest rates and income taxes are examples of factors that could have an impact on the economy because when a household has less income this means there will be fewer purchases, and saving becomes very important. A family’s disposable income can increase or decrease aggregate demand. When the economy falls there is the possibility that jobs will be lost and salaries will decrease. Businesses and individuals that pay taxes tend to change their spending behaviors based on their disposable income.
Economic downturns affect everyone during the time when the economy is down; households will search for discounts and purchase cheaper brands. Consumers feel less able to provide for their families when items that they normally purchased consistently increase in price. When demand is lower businesses tend to charge higher prices for their products that were cheaper when the economy was good.
The nations income can be explained using the aggregate demand –aggregate supply model (AD-AS). Economists believe that the AD-AS model will reflect the affect the national economy had on income at its current price. It is important to understand that the components of the AS-AS model tend to respond differently to the changes in price, (Colander, D. C., 2013).
After the data from this model has been analyzed the factors will show how to quantify the impact and have a means of predicting the future outcome of business and individual consumers. (Mincey, n.d.)
However, today’s economy appears to be in a recessive state upon evaluation. The average US resident is spending more money than they produce by way of employment that has created a higher debt to income ratio and has an overall affect in the investments made, affecting economic interest rates of aggregate supply and demand. The federal government has great influence on the interest rates since it is America’s biggest borrower. Today’s interest...