Aggregate Demand Analysis

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This paper is addressed to communicate examples and evidence explaining what happened economically based on aggregate demand and aggregate supply during the period 1973 to 1974 and in the present time. As an economic advisor, I will respond in a clear and rational way to explain these events. Supply and demand diagrams are used to analyze individual markets. But economists also use supply and demand to think about the whole economy. In particular we think about aggregate demand and aggregate supply. The whole point of developing the aggregate supply and aggregate demand framework is to understand what happens when the economy is hit by a big event, like a sharp rise in oil prices or a fall in housing prices.
Aggregate supply is the quantity of goods and services that the economy produces. Aggregate demand is the sum of the quantities demanded from the different sectors of the economy. These are the same sectors that make up gross domestic product.
• Personal consumption – Vehicles, food, housing, medical care, education, consumer electronics, and everything else that households can consume.
• Non-residential investment – Computers, factory machinery, software, office buildings, airplanes, and all the other long-lived capital investments that businesses use for production.
• Residential investment – Construction of new homes and renovation of existing homes.
• Government consumption and investment – Salaries and benefits of government employees; purchases of supplies and equipment; and construction of buildings, highways, and other infrastructures.
• Change in private inventories – Increase or decrease of inventories at manufacturers, wholesalers, and retailers.
• Net exports – Exports of goods and services to other countrie...

... middle of paper ...

...sonal consumption and residential investment are both components of aggregate demand, that means the aggregate demand curve shifts to the left.
Fewer workers are hired; the unemployment rate rises and growth slows. The implication is that the fall in housing prices leads to slow growth and to less inflation. This explains how at the present time, Macropoland is experiencing very sluggish consumption and investment as result of a fall in the housing market and unemployment has once again increased and inflation is very low.
Very low inflation nurtures the possibility of deflation, which is a drop in the average price level. This hurts lenders because borrowers pay back loans in money that’s worth less than normal. It is a decline in prices and the value of stocks, homes or other assets. Deflation can further curb spending and even push an economy into a recession.

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