Economic factors such as unemployment, expectations, consumer income, and interest rates have significant impacts on on aggregate demand and supply. While the right fiscal policies can increase both short-run and long-run aggregate demand and supply, Keynesian and classical economists do not always agree about the effectiveness of policy recommendations.
Over the past 12 months, unemployment has dropped from a high of 8.2 percent to its current level of 7.6 percent (Bureau of Labor & Statistics). The monthly unemployment figures read as follows from April 2012 to March 2013:
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
8.1 8.2 8.2 8.2 8.1 7.8 7.9 7.8 7.8 7.9 7.7 7.6
While expectations were improving earlier in the year, economic outlook is currently showing signs of widespread and growing pessimism. This is evident in the fact that in March, 2013 US employers hired at the slowest rate since July, 2012. In fact, payrolls expanded by just 88,000 last month outside the farming sector - a figure that was well below market expectations for a 200,000 increase and even fell short of the most pessimistic forecast in a Reuters poll (Lange).
While the above unemployment figures from the past year may appear promising, economists are cautioning that the jobless the tenth of a point drop in unemployment over the past month was largely due to people dropping out of the work force (Lange). The dropout rate is a sure sign that people are losing hope of finding work in the current economic setting. As an indicator of such, the Bloomberg Consumer Comfort Index which measures the difference between positive expectations and negative expectations by consumers remains in the red. In fact, at a score of -7, there is still a substantial amount of negativity when it comes to consumer confidence and expectations (Smialek).
With respect to consumer income, the news is perhaps even worse than Americans and economist fear. During the first quarter of 2013, in fact, Americans saw their income drop so dramatically that it marked the deepest one-month decline in 20 years (Kurtz). As the data reveals, personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis)(Kurtz).
Interest Rates Instruments
The interest rates for the week ending April 22, 2013 read as follows:
Discount window primary credit 0.75
Federal funds (effective) 0.15
Bank prime loan 3.25
(H.15 Selected Interest Rates)
The Effect of the Economic Factors on Aggregate Demand and Supply
In assessing the effect(s) of the above economic indicators on aggregate demand and supply, there are significant points of discussion arising from the data results and trends. For starters, unemployment remains high at 7.6 percent. The figure not only means that millions of Americans are out of work but many more are underemployed. As such, people have less money to spend and aggregate demand therefore shifts downward. With respect to aggregate supply, high unemployment can also reduce the supply of labor in the US economy as people simply quit looking for work because they are discouraged and have low expectations. In so many words, unemployment combined with low expectations serve to reduce aggregate demand and aggregate supply.
In terms of how the other factors impact aggregate demand and supply, the interest rate effect must always be taken into consideration because it impacts the supply of money and liquidity. Basically, an inverse relationship exists between interest rates and spending for consumers and businesses. Further, certain types of purchasing and spending patterns are sensitive to interest rates. In simple terms, with low interest rates, households and businesses are able to acquire more money. Therefore, although the current downward trend with respect to household income might offset the…