Question

What is the relationship between aggregate demand and consumption? Describe the various components of Aggregate Demand and the importance of each. How do changes in these components affect the economic outlook for the economy? What are the key determinants of Aggregate Supply?

In your own words, what is the difference between "real GDP growth" and "nominal GDP growth" and why do we care?

Define inflation and the unemployment rate, and explain why don't we like too much inflation and unemployment. Clarify the difference between the labor force participation rate and the unemployment rate.

Compare unemployment rates and inflation for the decade 1927-1937 and 2007 - 2016; cite your data sources and present the data in a chart that illustrates the contrasts; Compare and contrast these two eras in your own words.

Answer 1

The components of aggregate demand are consumption,investment , government spending ,and net exports Thus .Consumption accounts for a larger potion of aggregate demand. Consumption changes for different reasons like changes in income,taxes , expectation about future income,and changes in the level of wealth.

The various components of aggregate demand are consumption, investment, government spending , and net exports. Households account for consumption and an increase in consumption shifts aggregate demand to the right. Investment is spending by firms on capital. An increase in investment shifts the AD to the righ in the short run.Government spending forms a large part of aggregate demand and an increase in government spending shifts AD to the right.Net exports are difference between exports and imports.An increase in net exports shifts AD to the right

The economic outlook of the economy changes with change with AD.Shift of AD to the right leads to increase in real GDP and rise in price level.Again shift of AD to the left leads to decrease in real GDP and lower price level in the economy.

The determinants of aggregate supply are changes in labor force,changes in input prices, technology,productivity, government regulations,business taxes and subsidies and capital.

Nominal GDP is the value of goods and services in the economy and reflects inflation while real GDP is the value of goods and services in the economy adjusted for inflation.Thus real GDP growth reflects the increased output of the economy and is not influenced by inflation.

Inflation is sustained increase in the general price level in the economy.Unemployment rate reflects the condition of the economy when people who want to work do not get jobs even though they are actively looking for job.The combination of rising inflation and unemployment is called staginflation which would slow down the economy.

The main difference between labor force participation rate and unemployment rate is that participation rate measures the percentage of people in the labor force and unemployment rtae measures the percentage within the labor force who are jobless.

In 1927 unemployment rate was 4.2% and in 1937 it was  17.0%.In 2007 unemployment rate was4.5% and in 2017 it was 4.2%.Inflation in 1927 was 2.93% and in 1937 it was3.60%. In 2007 inflation rate was 2.8%and in 2017 it was 2.1%.In the decade 1927-1937 unemployment rate was very high and inflation rate was not very high. In the decade 2007-2017unemployment rtae fell and inflation was very low.

Sources-US inflation rate and unemployment rate data.