Answer to Question #313165 in Macroeconomics for captain nyagah

Question

Discuss the difficulties of using aggregate demand management to moderate business cycles

Answer 1

Whilst aggregate demand is useful in gauging the general strength of a country's consumers and industries. It has several limits. Because aggregate demand is based on market values, it indicates output at a specific price and does not indicate living standards or quality. Output gaps emerge when a country's current output is greater or less than its total output. According to the business cycle model, the economy is undergoing a positive gap when a business cycle curve is well above the projected growth. Similarly, when the business cycle curve is lower than the growth trend, it implies that the economy is facing a negative gap.

When the output exceeds productive capacity, aggregate demand outpaces aggregate supply, leading an economy to scorch. In this case, scorching implies that output is at an unsustainable high level, while the unemployment rate is much lower than that of the natural levels of unemployment (Karadas, 2018). The business cycle will reach a high then enter a recession. On the other hand, when actual output falls below potential output, aggregate demand falls, resulting in a decrease in output and employment. When there is a negative production gap, the unemployment rate rises above the normal unemployment rate. This means that the cycle will reach a trough then enter a period of expansion and recovery.

 

References

Karadas, E. (2018). The composition of aggregate demand, division of labor and the business cycle. SSRN Electronic Journal. <span style="font-family: &quot;inherit&quot;, &quot;serif&quot;; color: black;">https://doi.org/10.2139/ssrn.3324722</span>