Answer to Question #221297 in Macroeconomics for Blanca

Question

As a policy consultant, use the AD-AS framework to explain how the health of the South African economy can be improved given that a diagnosis of the health of the South African economy following changes in its macroeconomic indicators in the past 5 years. Make use of diagrams to aid your explanation

Answer 1

Aggregate demand has four elements: consumption, investment, government spending, and exports less imports. Aggregate supply reveals how businesses throughout the economy will react to a higher price level for outputs.

Therefore the AD-AS framework is useful in determining the impact of macroeconomic indicators in the health sector. For the country to improve the health sector, variations of the elements of AD-AS model must be positively changed.

The health sector affects all other sectors in the economy. The government should investment in the health sector with the aim of ensuring her people are healthy. Healthy people take part in the production activities in all the other sectors in the economy. This will result to the general increase in the gross domestic product in the economy which is a good indicator of economic growth and development. Increase in government expenditures in terms of increase in investment in the economy may result to a small change in the inflation phenomena.

The AD-AS model in the figure below illustrates the effects of inflationary pressures on both the aggregate demand and aggregate supply.

continual inflationary price increases can occur is if the government continually attempts to stimulate aggregate demand in a way that keeps pushing the AD curve when it is already in the SRAS curve’s steep portion. 

Increase in government expenditure in investments in the health sector may increase the unemployment levels in the economy. The government should make a consideration of the impact of increasing investment in the health sector versus the overall positive effect in the economy. The government must adopt a mechanism that will reduce the rate of unemployment in the economy and at the sam time stabilize the health sector.