Effects of an Expansionary Macroeconomic Policy Essay

Effects of an Expansionary macroeconomic Policy - Essay ExampleIn its simplest terms, this relationship works on the principle that price is refractory by the ratio of supply to demand a high demand and low supply necessitates a high price, whereas a low demand and high supply would be indicative of a subvert price. However, many more factors influence this AS-AD relationship. For instance, aggregate demand is influenced by interest rates, business and consumer confidence in the economy, the anticipation of inflation, and real wealth. Aggregate supply, on the other hand, is influenced by not only supply of resources, notwithstanding also productivity by the workforce and production costs.Speaking in general terms, an increase in aggregate demand might have the following short run consequences prices go out rise, output will increase in couch to attempt to meet the demand, and ultimately production will exceed the on-going workforces capacity, thus creating a demand for a larger workforce. In the long run, a new correspondence will be established with higher prices for product, production costs, and labor.There are several ways in which this new hypothetical political relation can decrease unemployment through either monetary polity or fiscal policy. As far as possible monetary policy actions are concerned, either the government can decrease the interest rate in order to stimulate investment and spending or, the government can increase the volume of money in circulation. ... The final result is that this increased demand requires a larger workforce to cover the demand for increased production. In other words, the governments plan for monetary elaboration necessitates a lower interest rate, which stimulates investment, output, and production, thus lowering the unemployment rate.However, at some point the government would pick out to increase interest rates in order to restore economic equilibrium. Addition tout ensembley, if output is above its indwel ling level, prices will initially increase, and in the long run output will eventually stabilise and prices will settle back down. Thus, a reverse chain reaction will occur where all aspects of aggregate demand will return to previous levels. Therefore, the governments increase of interest rates in order to reduce unemployment rates will have positive short-term publications in stimulating the economy, but will have virtually no long-term violence without supplementary intervention or a change in productivity.One way to ensure long-term results in this expansionary macroeconomic policy is to effect radical change within the workforce. Long run growth in aggregate supply requires a sustainable increase of real output. Thus, should a technological innovation increase productivity allowing a reduction of production costs, prices can be reduced as well. Output levels will then stabilize at a higher natural level, and stabilized prices and wages will follow.In conclusion, while an ex pansionary macroeconomic policy instituted by a government to reduce the unemployment rate would most-likely have the desired positive short-run effect (barring unanticipated variables such as loss of confidence in the economy) the long-run effects would be