Option 1, Part 1 – Evaluate the Current State of the Economy To analyze the current state of the economy the group will assess the following areas. Unemployment, expectations, and consumer income, and interest rates will be the focus in relations to the affects indicated on the aggregate supply (AS) and demand (AD) curve.
Labor market conditions are important especially for the following categories, businesses, individuals, and governments. The nation’s labor market conditions are constantly monitored by statistical analysis, unemployment rate being the primary metric. In April of 2014, the unemployment rate fell from 6.7% percent to 6.3% percent (Bureau of Labor Statistics. May 2014), which was the lowest rate since September of 2008. Since January the unemployment rate had been somewhat flat, but in April 2014 it dropped. However in April, the labor force additionally dropped by 806,000 (Bureau of Labor Statistics, May 2014) meaning the current ratio drop from 6.7% to 6.3% comparatively remains approximately the same as the constant trend. In other words, because of the decrease in workforce, the drop in unemployment may be partially a result of the decrease in workforce.
The consistent level of unemployment makes shifts on AD and AS curve minor. When unemployment decreases, as it did in April, a correlation linking the drop in unemployment to an increased demand of goods and services can be made. This increased demand requires the productivity of companies to increase to meet the supply deficit, creating more jobs for individuals. With a greater demand for goods and services, there is a greater need for people to produce them, therefore a decrease in unemployment.
Additionally, the decrease in unemployment means household income will improve, providing them with more disposable income. As noted above, because of the increase in demand (seen in the decline in the unemployment rate), a direct correlation can be made to an increase in supply, though delayed. The increase in supply increases the number of new employees as employers look to meet the demand for goods and services, shifting the AS curve to the right as well.
In most cases unemployment remains constant, but in US, the high unemployment rate (compared to the past) can have a negative effect on the economy. The steady unemployment rate can reduce the supply of labor in the economy, as unemployed people become discouraged and stop looking for jobs. This would shift the aggregate supply curve to the left. Also employers may use the threat of unemployment to cut wages, exploiting their workers.
The great intangible factor directly affecting the economy currently is people’s expectations for future economic growth. These economic expectations influence the economy greatly. If businesses and households are more optimistic about the future of the economy, they are more likely to buy large items and make new investments, increasing the aggregate demand. The AD can change in a variety of ways. Peoples expectations causes them to spend less or be forced to cut spending, it causes the government to cut its spending, and it causes businesses to be more money conscious when choosing what their investment in goods will be from other companies. As a gauge, many people look at the gross domestic product (GDP), the broadest measure of economic activity, which grew at a 0.1% annual pace in the first quarter of 2014 (U.S. Bureau of Economic Analysis, April 2014). This is slow growth compared to recent annual rates of 2% to 3% (U.S. Bureau of Economic Analysis, April 2014). Many think the slowdown was caused by the long winter felt throughout the country. These slow growth rates shift both the AD and AS curves to the left, as consumers and business feel the affect or people’s “wait and see” attitude in economy. Assuming this is all weather based, the economy should bounce as household moral improves with the...
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