Students Again

Aggregate Demand and Aggregate Supply:

The Aggregate Supply curve in is kinked into three distinct sections. Although the AS/AD model is based on J.M. Keynes' original model to get the country out of the Great Depression (which has a flat Aggregate Supply Curve), Keynes' model was  appropriate for the time. Why didn't he need/use the other two sections of the SRAS curve (the upward sloping and vertical sections)?

Region B of the SRAS curve is not considered because the reserve army of the unemployed is gone. Since there aren’t anymore  people in the reserve, firms must attract new workers by offering higher wages to reduce the idle people to enter the workforce and to entice current workers to work more. During the Great depression there was a very high unemployment rate, many people were out of work and a reserve army of the unemployed did exist. So this section was not appropriate to use.

Region C of the SRAS curve is not considered because there are no more workers to be found. During this region, firms need to try and steal workers from other firms. This is not the case during the great depression. So this section also was not appropriate to use.

Fiscal Policy:

According to Monetarists (a school of economic thought), government should not try to adjust to the changing economy. Rather, they suggest that the government set money supply growth rates (which is not fiscal policy). What reasons would an economist list to  support the idea that government action is often more harmful than effective?

There are many problems and complications that could arise from the government enacting and applying fiscal policy. Time lags, political problems, expectations, and state and local finances complicate fiscal policy. There is a time lag between the recognition of the beginning of a recession or inflation and the awareness that it is actually happening. Lag time between the times when there is a need for fiscal action to the time when it is implemented. There could have been months between these times before any action is taken and the situation most likely would have worsened.

Some politicians use fiscal policy to get reelected, causing a political business cycle. Sometimes there is not a good reason to  implement new fiscal policy; there are implemented to get votes. Fiscal policy may fail to achieve its goals because many people might think that some of the fiscal policies will be reverse. Since politicians used it as a political ploy, citizens might not expect any long term benefits to them for any fiscal policy change.

State and local governments often worsen rather than correct or reduce recession. They have to increase taxes and sometimes  impose new taxes to make up for the lack of revenue from the lack of public spending. State and local governments have to work to  balance their government’s budget. The actions they take might be contradictory to the federal fiscal policy and the affects it has on its citizens.