An unanticipated change in the growth rate of aggregate demand affects production and employment before they affect prices since an increase in demand, demands more production to satisfy the demands of people which affects employment since suppliers have to produce more to meet increasing demands, prices are affected later in that they go up since there is no change in real production and the demand is high (Web, 2003).
Reasons and causes for the downward tailspin of the economy:
High tax rates and increase in interest rates from banks. This reduces the quantity of products and services produced by suppliers due to high costs of production brought about by high taxes and interest rates they have to pay for. Demand also reduces because suppliers pass high prices to consumers.
Increase in prices of consumer goods and services and low employment. Since the products and services are limited due to high costs of production, demand increases leading to an increase in prices. Jobless people cannot contribute to economic growth.
If Congress wants to use fiscal policy to prevent a recession, it should cut taxes when there is confidence that a recession will happen because there are certain about it and the economic growth will be achievable.
The part of the American Jobs Act that will have the greatest impact on aggregate demand is the jobs tax credit. This is because an increase in tax credit will lead to rise in employment and therefore, increase spending from consumers.
References
Grinda, F. (2005). The economy: An optimistic thought experiment. New York: Economic Commission of Europe.
John, H. &. (1993). Does the Targeted Jobs Tax Credit Create Jobs at Subsidized Firms? Industrial Relations , 32, 3.
Web, A. (2003). Aggregate Demand Increase, Long-run Aggregate Market. Economic journal , 28.
