Macroeconomic Fundamentals: Demand, Supply, and Unemployment
Aggregate Demand and Supply
Aggregate demand represents the total spending across different sectors of the economy. Aggregate supply is the total amount produced and sold to companies within a given period.
Demand and Supply Curves
- Aggregate demand curve: Relates the demand for all goods and services to the price level.
- Aggregate supply curve: Describes the relationship between aggregate output and aggregate price levels.
Economic Equilibrium and Production
The breakeven point occurs when all products are sold without excess supply. Potential production is the state in which all productive resources are fully employed. A shift in the aggregate demand curve is known as an aggregate shock.
Unemployment Analysis
Effects of Unemployment
- Decrease in real production.
- Fall in demand.
- Increase in social deficit.
- Negative psychological and discriminatory effects.
Economic Perspectives on Unemployment
- Liberal (Voluntary Unemployment): Unemployment exists because workers are paid wages above equilibrium due to minimum wage laws.
- Keynesian (Involuntary Unemployment): Caused by an insufficient level of aggregate demand; if demand rises, unemployment decreases.
Types of Unemployment
- Cyclical: Occurs during the descending phase of the economic cycle.
- Seasonal: Caused by changes in demand at different times of the year.
- Frictional: Occurs when changing jobs, when companies underperform, or when a person enters the labor market for the first time.
- Structural: Occurs when workers are not adequately trained for available roles.
Phases of the Economic Cycle
- Recession: A descent in the pace of economic activity, characterized by high unemployment and low demand.
- Recovery: Improved expectations regarding the economic climate.
- Upswing: The climax of a recovery cycle.
Economic Policies
In Keynesian economics, to reduce unemployment, public spending should be increased. Supply-side policies include:
- Reduction of business contributions.
- Grants for hiring workers.
- Labor market flexibility.
Inflation: Causes and Effects
Causes of Inflation
- Excess Demand: Displacement of the aggregate demand curve.
- Excess Money in Circulation: A drop in the value of money.
- Supply-side Inflation: Higher costs of production factors.
- Structural Inflation: An increase in demand.
Effects of Inflation
- Reduces the competitiveness of national products.
- Distorts the information function of prices.
- Erodes the purchasing power of money.
- Damages creditors while favoring debtors.
- Increases the nominal cost of money.
Control of Inflation
- Excess Demand: Demand reduction.
- Excess Money: Monetary policy standards.
- Supply-side Inflation: Structural reforms.
- Structural Inflation: Fostering competition.