Unemployment and Its Effect on Aggregate Supply

¶ … Unemployment and its Effect on Aggregate Supply and Demand:

The Obama administration is looking for ways to create jobs and stimulate growth after temporarily setting aside the debt limit. The need for job creation and stimulating economic growth originates from the high unemployment that the country experiences. This high unemployment rate is an actual reflection of the serious shortfall of aggregate demand in the United States. The U.S. unemployment rate is high essentially because the country's economy is generating below its capacity. Actually, while the U.S. economy has made some gains from time to time, its real GDP is estimated at 6% below its trend path or capacity.

There are various reasons attributed to the high unemployment rate including its consideration as a consequence or outcome of the collapse of demand rather than a distinct, instantaneous problem. Some of the reasons attributed to the unemployment problem in the United States include the fact that it's regarded as a consequence of the deficient demand, a structural problem, and a cyclical issue.

As the United States continues to experience high rates of unemployment, this economic factor will continue having significant impacts on aggregate supply and demand. Aggregate demand can basically be described as spending by homes, businesses, and governments for the utilization of goods and services (Bartlett, 2011). This concept can also be defined as investments in machinery, structures, and equipment. The high unemployment rate contributes to low aggregate supply and demand because it reduces the aggregate income, which makes it difficult for households and businesses to increase their spending (Bartlett, 2011).

In order to deal with the high unemployment rate, the president should consider a raft of measures including increasing the aggregate spending by direct employment of workers or carrying out public works projects. Secondly, the government should focus on debating and finding the right policy for raising aggregate demand instead of increased focus on debt limit policy. This is mainly because lack of aggregate demand or inadequate consumption of goods and services is the main problem that even contributes to the debt crisis. The increased focus on debt crisis is considered as an attempt to deal with the symptom rather than treat the disease. The third recommendation is for the Federal Reserve to raise velocity and growth by moving money in the entire economy through tightening monetary policy.

From a Keynesian perspective, aggregate supply and demand is usually affected by various economic factors and decisions in both the public and private sectors that are sometime erratic. As a result, expected and unexpected changes in aggregate demand have significant short-term effects on actual output and employment. Therefore, prices, particularly wages, react to changes in supply and demand, which contributes to short-term shortages and surpluses, especially in the labor market. Unemployment is dependent on aggregate demand, which makes unemployment too high averagely and partly too variable (Blinder, 2008). As part of dealing with the high rate of unemployment, Keynesians propose two major strategies i.e. The establishment of stabilization policy and increasing aggregate spending through employing workers and conducting public works projects. The stabilization policy would help in lessening the amplitude of the business cycle, which is an important economic problem (Blinder, 2008).