ECO 1

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ECO 1

The macroeconomic representation of aggregate demand and aggregate supply positions the price level of a country against the degree of actual (real) output (Wells 34). Generally, in relation to the model, an increase within price levels is equal to inflation (Hoover 67). On the other hand, a decrease in the level of output is equated as a viable alternative for unemployment t(Hoover 67). This is based on the presumption that unemployment increases in the event that the output level decreases. Macropoland’s economy is a good illustration of the relationship between aggregate supply and aggregate demand.  In its first period, the region experienced an inflation rate of approximately 15 percent. Simultaneously, the country experienced a level of unemployment of nearly 13 percent. In the present period, the setting underwent considerable sluggish consumption and investment thus indicating an unemployment level of 9 percent and a low rate of inflation, which was at 0.4 percent. The period between 1979 and 1983 in the United States represents the occurrences of this period perfectly (Wallich 21). In the respective period, the American economy experienced a trade off that saw the rate of inflation falling to 2.5 percent from 15 percent (Wallich 22). In addition. The rate of unemployment was accompanied by an increase to 11 percent from 5 percent (Wallich 22). Overall, both periods illustrate a trade-off amongst the aspects of unemployment and inflation. As such, the trade-off amid the respective aspects is connected to with a change within the aggregate demand. This is mainly because the curve representing the aggregate demand slopes downward. On the other hand, the curve indicating the aggregate supply slopes upward. In this respect, a change in the respective curve would not illustrate any trade-off between unemployment and inflation. Nonetheless, both unemployment and inflation increase when the curve representing the aggregate supply moves towards the left as evidenced by the increases in the respective aspects within the first period.

The first period indicates an increase in both unemployment and inflation. As such, it is correct to assume that the respective occurrence indicates an increase in the aggregate demand as experienced by the economy. Accordingly, a rise in the aggregate demand will lead to an increase in the output (McElroy 45). This is further evidenced when the respective economy edges closer towards complete (full) employment. However, the increase in output as well as full employment only leads to an increase in the rate of inflation. In the first period, the rise in unemployment to 13 percent influences the rise of the inflation levels to 15 percent. Such figures are different from the country’s natural unemployment rate, which is 4.5 percent, specifically at full employment. In addition, the average level of inflation in the long run is nearly 2 percent. Hence, an increase in unemployment, which eventually causes a rise in the rate of inflation within the first period, illustrates full employment of the GDP in terms of consumption and investment (McElroy 51). However, full employment of the GDP also influences an increase in price levels due to increased spending among consumers (Scarth 325). Contrary to the first period, the developments in the second period illustrate repressed rates of inflation and unemployment. Indeed, if the economy began experiencing a high rate of inflation as shown in the period, then it is possible to assert that fiscal measures were applied in order to lessen consumer spending (consumption) as well as investment. Such occurrences, as identified by the sluggish consumption and investment, eventually led to lower rates of aggregate demand. The decline in the aggregate demand eventually led to a lower rate of inflation.

Works Cited

Hoover, Kevin D. Applied Intermediate Macroeconomics. Cambridge: Cambridge University Press, 2012. Print.

McElroy, Michael B. The Macroeconomy: Private Choices, Public Actions, and Aggregate Outcomes. Upper Saddle River, N.J: Prentice Hall, 2006. Print.

Scarth, William. “Aggregate Demand-Supply Analysis and Its Critics: an Evaluation of the Controversy.” Review of Radical Political Economics 42.3 (2010): 321-326. Print.

Wallich, Henry C. “Lessons from the 1970s.” Economic Impact. (1983): 20-24. Print.

Wells, Graeme. “Teaching Aggregate Demand and Supply Models.” Journal of Economic Education 41.1 (2010): 31-40. Print.