This paper discusses the current state the following economic factors: unemployment, expectations, consumer income, and interest rates and analyses their effects on the aggregate supply and demand. For a long time the economic strength of the United States has underwritten its principal role in the affairs of the entire world. The basis of the nation’s global hard power has been buoyant tax proceeds that have greatly been influenced by massive economic growth. However, currently the United States requires countering the effects of much worse economic challenges than it has ever experienced in the past. Some of these economic issues include the blowback effects arising from the European debit crisis, effects of the Great Depression, and the likely unsustainable public debt due to lack of modification of fiscal course (Thomas & Carson, 2011). However, in order to understand the current state of the U.S. economy, it is significant to consider economic factors like unemployment, expectations, consumer income, and interest rates including their effects on the aggregate supply and demand.
It is significant to note that unemployment happens when and individual engages in an active search for employment but becomes unsuccessful at finding work. According to Bureau of Labor Statistics (2015), the current rate of unemployment in the U.S. stands at 5.3 percent thereby giving the figure of unemployed people as 8.3 million. The rates of unemployment differ significantly among the most essential worker groups. For instance, the rate of unemployment for adult women stands at 4.8 percent, adult men at 4.8 percent, teenagers at 18.1 percent, Hispanics at 6.6 percent, Asians at 3.8 percent, and whites at 4.6 percent. This statistics comprise a clear indication that the rate of unemployment is still high. An increased rate of unemployment implies that people do not have enough money and this usually leads to decreased demand in the economy. Unemployment decreases labor supply in the economy influencing a slowdown in economic growth. In such a situation many employers may capitalize on the threat of high unemployment rate to reduce the wages (Thomas & Carson, 2011). This means that a lot of people will be disparate for work. Therefore, unemployment increases aggregate supply and decreases aggregate demand. This is because unemployment causes most households lack lack wages meaning that there will be reduced production of goods and services due to the reduced purchasing power.
Expectations comprise a significant factor of economy. With respect to consumers, expectations consider three essential areas namely consumers prospects regarding their financial situation, their view of the economic prospects in the medium term, and their perception of the general economic prospects in the long run (International Monetary Fund, 2015). Currently, consumer expectations in the U.S. economy stand at 84.1 percent. Most Americans expect that the rate of inflation will hit 2.8 percent in the next one year (International Monetary Fund, 2015). They, also, expect that consumer prices will increase to 2.8 percent over the next years. Consumers continue conducting a favorable assessment of the current condition even though their expectations in the short-term continue deteriorating. Since consumers are usually sensitive and always have particular expectations regarding the future of the nation’s economy, they will have to make adjustments in their spending in order to match their expectations. In a situation where they expect the economy to underperform in the future, the culture of saving will increase thereby influencing a reduction in the overall expenditures. This will, in turn, lead to an increase in aggregate demand due to increased price levels. However, expectations that the economy would perform well in the future influence consumers to save little money because there is no fear of increase in price levels. There will be a reduction in consumption expenditures thereby leading to an increase in aggregate supply and a reduction in aggregate demand.
Consumer income equally is a significant economic factor that is worth consideration. It is the amount of income that remains after living expenses and taxes have been deducted. It is actually the money that an individual saves, invests or spends. Generally, consumer income has increased significantly over the past two decades. Currently, the median consumer or household income has remained at an average of $55,627 (International Monetary Fund, 2015). An increase in consumer income leads to an increase in aggregate demand. This is because there will be an increase in average tendency to spend. The availability of money to spend implies the ability to afford goods and services, which then leads to an increase in aggregate demand.
Interest rates comprise a significant element of aggregate supply and demand. An interest represents an annual percentage of the outstanding loan. The U.S. central bank is the Federal Reserve System. There are several banks in the U.S. that charge significantly different interest rates ranging from 0.05% to 0.25% per annum (Beyer, 2014). Lower interest rates can trigger the aggregate demand to increase shifting it to the right side of the curve. This is because a decrease in interests encourages players in the business sector to increase their investment expenditures. On the other hand, higher interest rates can influence a reduction in aggregate demand shifting it to the left side of the curve. It will cause reduced investment expenditures in the business sector. There will also be a reduction in household expenditure on durable goods.
In order to improve the economic standard of the U.S., the administration requires considering a number of recommendations as highlighted in this document. Unemployment benefits should be renewable. Although unemployment insurance has been of great assistance to households that obtain it, its significance to the economy should not be overlooked because people who receive it end spending the money on various things (Beyer, 2014). The second consideration is the current administration should consider extending the Bush taxation cuts in order to help increase consumer income. This extension will prevent any occurrence of a devastating tax increase in the near future. The federal government should, also, cut its spending by assigning certain duties to the private sector. The federal government should overhaul its immigration law to ensure that an increased number of skilled immigrants are given priority during admission into the U.S. every year.
In conclusion, this paper discussed the current state the following economic factors: unemployment, expectations, consumer income, and interest rates and analyses their effects on the aggregate supply and demand. For a long time the economic strength of the United States has underwritten its principal role in the affairs of the entire world. Unemployment decreases labor supply in the economy influencing a slowdown in economic growth. Expectations consider three essential areas namely consumers prospects regarding their financial situation, their view of the economic prospects in the medium term, and their perception of the general economic prospects in the long run
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