Economics and Quantitative Analysis Demand and Employment

Questions: 1.Explain why real GDP might be an unreliable indicator of the standard of living. 2.Why does unemployment arise and what makes some unemployment unavoidable? 3.Consider the following statement: When the average level of prices of goods and services rises, inflation rises? Do you agree or disagree? Explain. 4. What is the aggregate demand (AD) curve and why does it slope downwards? Explain. 5.What is the long run aggregate supply (LRAS) curve and why is it vertical? Why does the short run aggregate supply curve slope upwards? Answers: 1. In order to measure the standard of living, real GDP is mostly used however; due to several causes, it can be misleading. This is mostly because real GDP does not comprise household production, useful activities performed in and around the house by the house owner. This in turn creates key measurement problem as these tasks are considered as an important element of the work of the individual. The underground economy as well as the economic activity that is legal is omitted by Real GDP (Fleurbaey and Blanchet 2015). It also does not include the measurement of health and life expectancy of an individual. Environmental harm is also barred from real GDP. Leisure time of an individual is also not a part of real GDP. Leisure time are valued by everyone and as a result, an increase in the leisure time enhances economic welfare of an individual that in turn lowers the well-being of the nation. Thus, it can be concluded that an economy that grows at the expense of its environment, misleadingly appears to offer greater economic wellbeing as compared to a similar economy that expands somewhat more slowly but at less environmental cost (Brynjolfsson and McAfee 2015). 2. Unemployment is mostly considered as an e economic reality and even a healthy economy has a certain level of unemployment. Unemployment arises mostly due to government regulation. According to labor laws, employers require to pay certain amount of wages and provide health insurance as well as other benefits when they hire a certain number of workers. This in turn adds to the cost of every worker and forces companies to hire fewer workers and terminate existing employees in order to make the remaining workforce more reasonably priced. Unemployment also arise due to increased competition between trades that leads to unemployment as trades looks for ways to reduce their costs in order to enlarge expansion or draw investors. Increased automation is also considered as a major historical reason of unemployment that leads to job loss in some industries. Increased automation is also referred to as increased technology that displaces employees. On the other hand, assistance programs by gov ernments that offers financial help to the unemployed workers are mostly considered as the root reason for unemployment. In other words, a noteworthy portion of unemployment statistics refers to individuals who register as part of the labor force in order to receive benefits. The most common cause for structural unemployment is technological change. In the long-run demand for workers is larger as compared to the temporary demand. As a result, the rate of unemployment is larger as compared to its natural rate (Levine 2013). Unemployment is unavoidable because there are always people who enter the workforce looking for a job at any point in time. On the other had there are some individuals who stops looking for a job if they are not able to find any. Unemployment is also unavoidable due to the existence of depressed employees (Holzmann, Gcs and Winckler 2012). 3. It is agreed that when the average level of prices of goods and services rises, inflation rises. Inflation is considered as the rate of increase in prices over a given time period. Inflation represents the overall expense of the appropriate set of commodities and services over a certain time period. The cost of living of an individual depends on the average level of prices of goods and services. Inflation is all about the general increase in the prices of goods and services. The major inflationary trigger is the fall in unemployment or the increase in economic movement. Inflation leads to speculative purchasing that leads to wastage. The average increase in price is mostly associated with inflation that is increases in paper money (Woodford 2012). 4. In macroeconomics, aggregate demand indicates the total demand for completed goods as well as services in an economy at a specified time. It denotes the amounts of commodities and services that will be purchased at all possible level of prices. It is also indicated as the demand for the gross domestic product of a country. It is also known as the effective demand however; at other times, this term is eminent (Gal 2013). The aggregate demand curve mostly slopes downwards due to three diverse effects, such as wealth effect of Pigou, interest rate effect of Keynes and exchange rate effect of Mundell-Fleming. Figure 1: aggregate demand curve slopes downwards (Source: Created by Author) According to the Pigou effect, a higher level of price indicates lower real wealth and as a result, lowers consumption spending. This in turn gives a lower amount of goods demanded in the aggregate. On the other hand, when prices fall an individual becomes wealthier, a circumstance that induces more customers spending. Therefore, a fall in the price level persuades customers to spend more, thus raising the aggregate demand. The Keynes effect on the other hand, states that a higher level of price implies lower real money supply and as a result, higher rates of interest results from fiscal market equilibrium. On the other hand, a low rate of interest raises the demand for investment as the cost of investment decreases with the rate of interest. The third cause that slopes the aggregate demand curve downwards is the exchange rate effect of Mundell-Fleming. Domestic investors mostly have a tendency to invest in foreign currency, if the domestic rate of interest is low as compared to inte rest rate available in foreign countries (Rao 2016). 5. The relationship between price level and output in the long-run is represented by the long-run aggregate supply. It differs from the short-run aggregate supply and is a presentation of potential output. Since LAS is considered as impending output, it is shifted by the factors that have an impact on impending output. These factors includes obtainable resources, capital, private enterprise as well as technological developments (Case, Fair and Oster 2012) Figure: LAS curve is vertical (Source: Created by Author) The LAS curve is vertical because, it indicates a potential output and when this takes place all prices, such as input prices, increases when an increase in price level takes place (Motyovszki 2013). Figure: SAS curve is upward sloping (Source: Created by Author) The graph shows that the SAS (short-run aggregate supply) curve is upward sloping as firms have a tendency to rise the level of price with the increase in demand and because in sale markets they are upward sloping curves. The two major theories that help to explain why the SAS curve is upward are the sticky-wage model and the sticky-price model (Bernanke, Antonovics and Frank 2015). References Bernanke, B., Antonovics, K. and Frank, R., 2015.Principles of macroeconomics. McGraw-Hill Higher Education. Brynjolfsson, E. and McAfee, A., 2015. 5. Computing Bounty: GDP and Beyond1.Understanding the Growth Slowdown, p.87. Case, K.E., Fair, R.C. and Oster, S.M., 2012.Principles of economics. Prentice Hall,. Fleurbaey, M. and Blanchet, D., 2015. Book Review of Beyond GDP: Measuring Welfare and Assessing Sustainability. Gal, J., 2013. Notes for a new guide to Keynes (I): wages, aggregate demand, and employment.Journal of the European Economic Association,11(5), pp.973-1003. Holzmann, R., Gcs, J. and Winckler, G. eds., 2012.Output decline in Eastern Europe: unavoidable, external influence or homemade?(Vol. 34). Springer Science Business Media. Levine, L., 2013. The increase in unemployment since 2007: Is it cyclical or structural?.Current Politics and Economics of the United States, Canada and Mexico,15(3), p.345. Motyovszki, G.E.R.G.?., 2013. The Evolution of the Phillips Curve Concepts and Their Implications for Economic Policy. Rao, B.B. ed., 2016.Aggregate demand and supply: a critique of orthodox macroeconomic modelling. Springer. Woodford, M., 2012.Inflation targeting and financial stability(No. w17967). National Bureau of Economic Research.