Aggregate Demand and Supply Models

Aggregate Demand and Supply Models

Team C: Crystal Craft, Sharon Frank, Germaine Jamerson, Equland Parker, and Khris Wilson

ECO 372

December 17, 2013

Dr. Robert Muniper

Economic Factors

Unemployment

When unemployment is brought up – most people only think of those that are not working. Actually the unemployed includes not just those not working, but also those that are able to work but are not even interested in working. It also includes those that are waiting for a job they may have applied for but have not received word on and those that have recently been laid off. Unemployment affects the aggregate supply and demand in many ways. Unemployment dropped from 7.0 percent in November 2013, according to the Bureau of Labor Statistics. “This is the lowest unemployment has been since December 2008” (National Unemployment Update, 2013). This was part due to the partial government shutdown in October. When this was over, the increase in the labor force as workers went back to work changed the rate of those deemed as temporarily unemployed. Otherwise, the unemployment rate did not change much. “The number of long term unemployed was essentially unchanged at 4.1 million but has declined by 718,000 since last year” ("U.S. Bureau of Labor Statistics", n.d.). When unemployment is high, there is less demand in the economy. This may change the aggregate demand curve to the left. Suppose that firms initially sell all that they produce.  “When consumption falls, aggregate demand falls by an equivalent amount.  This demand shock creates a gap between sales and production.  While Keynesian macroeconomics asserts that reduced sales cause firms to cut output and employment, supply-side economists argue that other market adjustments in the economy act quickly and automatically to offset the drop in consumer spending and to fill in this demand gap” (Federal Reserve, n.d.).  These offsetting market responses or mechanisms rely on the changes in various prices, including...