Aggregate supply refers to the total goods and services produced by the US economy over a period of time while aggregate demand is the total consumer goods and services in the economy. When we talk of supply in the United States, we are usually referring to the aggregate supply within a typical time frame in the year. The time is very important since supply changes slowly as compared to demand. The factors of production will determine the amount to be supplied to the economy. The amount is usually called the natural rate of output. America is blessed with almost all the factors of production and the American companies produce more than 20% of the global supply.
Labor supply is high in the US since people are well educated and have the required skills and motivation and can respond to the changes in business needs. However, the high cost of labor is leading to outsourcing thus creating unemployment. Capital goods like machinery and equipment are available in the US since it is a technological innovator in capital good creation.
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Fiscal policies advocated by the government
About 70% of the US economy is driven by consumption. The consumption is very high that it exceeds the supply and the country has to rely on foreign goods and services, to maintain this. The changes the US government has made to the national budget to influence the economy, though not the best, has been good. The government consumes more than it receives in terms of revenue. To reduce this government is embracing a culture of saving and investment with consumption being maintained. The policies advocated are to reduce interest rates from commercial banks, which will enable people to borrow and invest. Also, the government is raising money through bonds and securities. The government is investing in infrastructure which creates employment and increase per capita income thus the citizens are able to spend.
Keynesian theory
Keynesian argued that the solution to stimulating the economy was through investing by use of these two approaches. He advocated or monetary policy in which there would be a reduction in the rates of interest by the central bank. He advocated a fiscal policy in which the government ought to invest in infrastructure. Government should borrow from issuing bonds and securities. The classical theorists argued that demand and supply should be maintained at equilibrium. This attributed to high unemployment during the depression leading to other methods of controlling the economy.
The US is not doing enough to control unemployment and inflation which are the major problems to the economy. Based on Keynesian and classical theories, they need to do what they could to create a sustainable policy.
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- Ip, G. (2013). The little book of economics: How the economy works in the real world. Hoboken, N.J: Wiley.
- Mishel, L., Bivens, J., Gould, E., & Shierholz, H. (2012). The state of working America. Cornell University Press.
- Orhangazi, O. (2008). Financialization and the US economy. Cheltenham, UK: Edward Elgar.
