Discuss the importance of AS-AD model in explaining the macroeconomic conditions of the economy and business cycles like recessions.
There is a need to explain the AS-AD model in that it is the model that finds great use for economists as they try to explain fluctuations in the economic activities witnessed in the short-run during a long-run trend. In this manner, the AD-AS model helps in showing the reasons for the shifts in aggregate demand contrary to the changes in aggregate supply. The rule which needs to be followed, and which is the main influence on the business cycle is the shifts in the aggregate demand. In this case, any rise in aggregate demand leads to the increase in the GDP, economic output and the results in higher employment. Decrease in the aggregate demand, on the other hand, has a negative effect; this is because the aggregate demand can affect economic growth only when there are shifts of the same along a relatively flat part of the aggregate supply (Reifschneider, Wascher, & Wilcox, 2015). A shift of the aggregate demand along the vertical range of the aggregate supply only results to changes in prices.
What factors shift AS and AD curves? How do you explain macroeconomic fluctuations using AS-AD model and AS/AD curves?
Shifts in the aggregate supply curves are caused by potential increase in GDP over time, increase in resources, increase in machinery and equipment and introduction of new technology. Shifts in the aggregate demand curve are such as the changes in government policies among them being taxes and government purchases, changes in the expectations of household and firms, and changes in foreign variables such as exchange rates and relative income between countries (Reifschneider, Wascher, & Wilcox, 2015). With regards to the macroeconomic fluctuations, a long-run increase in aggregate demand lead to an increase in the price of a good or a service. An increase in demand leads to a shift in the aggregate demand curve to the right. Moreover, labor, capital and technology are only affected only affect aggregate supply in the long-run.
Unit 8 Discussion Topic 2
What are the long-run macroeconomic goals? What is long-run macroeconomic equilibrium? How the goals are related to the macroeconomic equilibrium?
The main long-run macroeconomic goals are economic growth, increase in employment opportunities for citizens, stability of prices and external balance. The long-run macroeconomic equilibrium is a shift in the aggregate supply to the right due to the lower costs of resources, and the economy producing a level of output which is consistent with full employment. Additionally, there will also be realized a decrease in aggregate demand, adjustment of price levels and decline of output to levels consistent with full employment. The same would result in higher price level and inflation would lead to the increase in aggregate demand (Reifschneider, Wascher, & Wilcox, 2015). The goals are related to macroeconomic equilibrium in that the equilibrium shifts to such a level that makes it practical to realize the goals.
Suppose that consumers and investors become pessimistic about the future health of the economy. What will happen to aggregate demand to output?
On the occasions when consumers become pessimistic about the future of the economy, they tend to reduce their expenditures resulting to the shift in aggregate demand to the left and the fall of output. Such a scenario would call for the adjustment of fiscal policy to increase the aggregate demand, and this could be done through increasing government spending or cutting taxes (Reifschneider, Wascher, & Wilcox, 2015).
Reifschneider, D., Wascher, W., & Wilcox, D. (2015). Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy. IMF Economic Review, 63(1), 71-109.
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