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The Federal fund rate has demonstrated a declining trend and since 2008 has stabilized close to zero. The 30-year AAA bond rate shows a cyclical movement with the rates moving upward in the beginning and end of each year.
Figure 2 demonstrates the prices from 2008 through 2012. This shows that the annual movement of the PPI (producer price index) and CPI (consumer price index) are moving almost at the same direction. From 2008 through 2009, both CPI and PPI showed slight downward movement which could be observed by a huge fall in Inflation (i.e. percentage change in CPI).
However, since 2009, both CPI and PPI have increased gradually, and so has inflation. From the figure it can clearly be concluded that since 2008 to 2009, there was a fall in inflation due to the marginal fall in CPI however, since 2009, the CPI index has gradually climbed up, increasing inflation rate.
Figure 3 demonstrates the real values of GDP and the different components of GDP viz. consumption, investment, government expenditure, and net export in real terms. This demonstrates that the real GDP marginally increased in 2009 due to the marginal increase in real consumption. Real investment fell in 2009 but again rose through 2010 and 2011.
Government expenditure increased from 2008 through 2011. The real net export showing the difference between net export and net import has decreased showing a rise in export and fall in import. The overall real GDP or output is calculated as a sum of the four components shown in the graph. Evidently, it can be observed that with no definite increase or decrease in the value of the components real output remained stable from 2008 through 2011.
Figure 4 provides monthly unemployment rate from 2008 through 2012. Unemployment rate in the USA has been increasing since 2008 through 2009. Since 2010, it has shown marginal decline.
This section uses aggregate demand (AD) and aggregate supply (AS) model to demonstrate the effect the above data AD and AS. Figure 5 shows that AD-AS model graphically. AS and AD are determined by the interaction of the average price rates that may be determined my CPI and the real income level in our case it would be Real GDP.
As CPI fell there was an increase in real GDP as demonstrated in figure 2 and 3. With fall in price index, the real output increases thereby providing a negatively sloping AD curve. AS demonstrates that with increase price the supply of goods and services to the economy will raise and therefore a positively sloping AS curve.
The point of interaction of AD and AS demonstrates the equilibrium position. If there were increase in prices, with Real output remaining same, there would be a decline in demand in the economy, creating excess demand, as supply would increase. In order to fill the gap of demand and supply, the real output would fall, thereby shifting the AD curve to the left thereby bring the economy back to the equilibrium position.
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With the reduction of interest rates, as demonstrated in figure 1, there was greater supply of money in the economy, therefore, people having greater disposable income. An increase in disposable income increased consumption, thereby, increasing real GDP, which in turn would shift the AD curve rightwards.
However due to an increase in demand, the supply too has to be increase, thereby, increasing production and shifting the AS curve to the right. Inversely, with higher unemployment rate the demand in the economy would decline, and so would reduce Real GDP and average prices.