Personal Income Inequality and Aggregate Demand

Questions: 1. Explain why real GDP might be an unreliable indicator of the standard of living. 2. Why does unemployment arise and what makes some unemployment unavoidable? 3. Consider the following statement: When the average level of prices of goods and services rises, inflation rises? Do you agree or disagree? Explain. 4. What is the aggregate demand (AD) curve and why does it slope downwards? Explain. 5. What is the long run aggregate supply (LRAS) curve and why is it vertical? Why does the short run aggregate supply curve slope upwards? Answers: 1. Gross Domestic Product is defined as the monetary value of all completed commodities as well as services that are produced within the border of a country. GDP is considered as a wide dimension of the overall economic activity of a nation. It is calculated by making the use of the following formula: GDP = C + I + G + NX Real GDP on the other hand, is not considered as a reliable indicator of the standard of living. This is mostly because, it does not include production activities of a homemaker as well as other household production activities. It also deserts the background of the economy as well as the health and life expectancy of individuals. The destruction that are caused by ecology are also not considered as a part of real GDP. Real GDP, for example, takes into account the overall market value of all goods as well as services that are manufactured in Australia after the deduction of cost of goods and services (Egerer, Langmantel and Zimmer 2016). 2. Unemployment is described as a circumstance where an individual of working age is not able to find a job however; would desire to be full time employment. The persistent measurement of unemployment is the rate of unemployment. In Australia, for example, in the year 2016 the seasonally accustomed rate of unemployment increased to 5.7 percent. As per the reports, the percentage was to some extent above the consensus of the market. Unemployment mostly takes place due to regulation of the government as well as augmented competition between businesses. Due to immobility in occupation, the discrepancy of skills in the labor market leads to unemployment that in turn leads to difficulties in learning innovative skills (Weiss 2014). The diagram shows that real wage unemployment takes place in a competitive market where Q2 illustrates the supply of labor that is more than W2. The diagram also shows that the demand for labor Q is less as compared to the supply for labor. The people to enter the labor force in order to search for a job at a certain point mostly makes unemployment unavoidable. On the other hand, it becomes unavoidable as some people does not search for job any longer once they are not able to find any. Similarly, this leads to depression among individuals that also makes unemployment unavoidable (Gregg et al. 2014). 3. The measurement that examines the weighted average prices of a basket of commodities and services of individuals are termed as consumer price index. The CPI is considered as a statistical estimate that is constructed by making the use of a sample representative objects whose prices are combined periodically. The level of price is the dimension of current prices of goods that are manufactured in an economy within a precise period of time. However, inflation is described as the rate at which the wide-ranging level of price for goods and services is augmented. On the other hand, the purchasing power of currency reduces (Einav and Levin 2014). The increase in the average level of prices of commodities and services leads to increase in inflation. This takes place due to the fact that the cost of living depends on the average level of prices for both commodities as well as services. In this case, the major inflationary trigger is indicated by rise in economic movement. As a result, it can be concluded that inflation mostly takes place due to augment in average prices for goods and services. The economic dimension of the sum of all accomplished commodities and services that are manufactured in the economy are termed as aggregate demand. It is mostly expressed as the overall amount of money that is exchanged for those commodities and services. The relationship between two factors that includes the quantity of demanded output and aggregate level of price is illustrated with the help of the aggregate demand curve. The curve mostly illustrates the total quantity of all goods that is demanded by the economy at varied level of prices. The consumer price index (CPI) mostly measures the aggregate price level (Carvalho and Rezai 2016). 4. The aggregate demand curve slopes downwards due to Pigou's wealth effect. It describes the incentive of output and employment that are caused by rising consumption because of increase in real balances of wealth. The second reason that leads to downward sloping aggregate demand curve is Keynes's interest-rate effect. According to Keynes, the rate of interest affect expenditures more than it affects savings. With the decrease in price, a specified amount of money will rise in value. The third and the final reason is the exchange-rate effect of Mundell-Fleming. It demonstrates the short-run relationship between the nominal exchange rate, rate of interest and output of an economy (Benhabib, Wang and Wen 2015). The aggregate demand curve is demonstrated under the assumption that the government holds the supply of money is constant. The diagram shows that the level of price of all final goods and services are indicated by the vertical axis. 5. Aggregate supply is defined as the total supply of commodities and services that are companies are willing to sell at a given level of price. In the long run, capital and technology affects the aggregate supply curve. The long run aggregate supply curve is stagnant as it shifts the slowest of the three varieties of the aggregate supply curve. The vertical aggregate supply curve demonstrates the theory of the economists that states that aggregate supply curve changes due to short-term change in total output of an economy. An increase in population, for example leads to shift in the long run aggregate supply curve (Erosa, Fusterz and Kambourov 2016). On the other hand, the rise in price leads to increase in short-run aggregate supply curve. The fall in wages as well as increase in physical capital leads to short-run aggregate supply curve. References Benhabib, J., Wang, P. and Wen, Y., 2015. Sentiments and aggregate demand fluctuations.Econometrica,83(2), pp.549-585. Carvalho, L. and Rezai, A., 2016. Personal income inequality and aggregate demand.Cambridge Journal of Economics,40(2), pp.491-505. Egerer, M., Langmantel, E. and Zimmer, M., 2016. Gross Domestic Product. InRegional Assessment of Global Change Impacts(pp. 147-152). Springer International Publishing. Einav, L. and Levin, J., 2014. Economics in the age of big data.Science,346(6210), p.1243089. Erosa, A., Fusterz, L. and Kambourov, G., 2016. Towards a micro-founded theory of aggregate labor supply.The Review of Economic Studies, p.rdw010. Gregg, P., Machin, S. and Fernndez?Salgado, M., 2014. Real wages and unemployment in the big squeeze.The Economic Journal,124(576), pp.408-432. Weiss, A., 2014.Efficiency wages: Models of unemployment, layoffs, and wage dispersion. Princeton University Press.