The AD/AS model is a simple but important way to explain challenging governmental decisions. The visual nature that the model presents, advanced by the dynamic ways it applies macroeconomics allows authorities to make general predictions regarding economic events. Picking a budgeted occurrence to study its effect on the tenets of the national economy helps the lawmakers to set necessary policies that ensure optimization of resources. For instance, parliamentarians apply the AD/AS model when deciding whether to add tax levels on a particular item or to reduce it. The effect that such a policy would have on the demand for the product is a critical national consideration.
However, the model slightly differs from the fundamental demand and supply curves. Deriving the aggregate demand involves summing up the application functions of all the goods in the market. The aim, therefore, is to attain a stable level of demand that indicates a consistent national economic growth. The specific demand equation is more relevant when forecasting total future requirements than an instance when the allocation of resources takes a particular direction. Economists will, therefore, detail the behavior of the request before passing bills into law. For example, it is possible to explain the decision to reduce the rate of immigration in the country. However, it is important to determine the level of production among various sectors before stamping the proposed bills.
The second part of the economy is the supply side that represents the producers of goods and services. Supply corresponds with demand thus, aggregate supply complements total demand. The manufacturers design products that meet a satisfactory level of demand thereby projecting to capture consumers’ tastes and preferences. Also, the aggregate supply is responsible for the degree of unemployment and the amount of total demand in the long run. Realistically, a country possesses limited resources. Therefore, the AS curve hits a maximum level after determining all factors of production. However, it is possible to interrupt the equilibrium level of output in the long run. If a country can add more to its resource base, then the maximum aggregate supply shifts further to the right.
The discovery of a valuable natural resource positively affects the resource reservoir or rather the base in a country. Had the state reached maximum production levels, then it gets a boost as more manufacturing alternatives emerge. The extraction of the newly discovered natural resource will create more employment. Take a case of a recently found gold mine. Besides setting up controls of mining, the process would involve skilled and unskilled labor that was under the unemployed population. Consequently, consumption would increase significantly thus increasing real GDP. The increased national output results to decreasing general prices of goods and services. Reducing the inflation means that consumer’s propensity to consume is higher than the interest rates. Therefore, banks would reduce the interest rates to maintain a competitive edge. As a result, the cost of credit decreases thus availing funds for investing further drives the level of output upwards until the economy realizes a new long-run aggregate supply.
Reference List
Duffy, J. (2014). Macroeconomics in the Laboratory, in John Duffy (ed.). Experiments in Macroeconomics (Research in Experimental Economics, Volume 17) Emerald Group Publishing Limited, 1-10.
Reid, C. D. (2003). An Encyclopedia of Macroeconomics. Reference Reviews, Vol. 17 Iss: 7, 20 - 41.
