AD/AS Model of the U.S. Economy During the Great Recession
The Great Recession was one example of the failure of the American economy. During this period, mortgage regulatory problems caused the housing sector to collapse, which, in turn, led to a decline in other economic indicators. For instance, according to Field (2022), by the end of 2009, the unemployment rate had reached 10%, while in ethnic minority households, it reached 15%, which was an extremely deplorable outcome (para. 5). As relevant parameters to consider, aggregate demand (AD) and aggregate income (AS) are viewed as critical parameters to analyze when assessing the effects of the Great Recession. Using inflation, a critical economic parameter, as an example, in Figure 1, two graphs are presented in which the respective shifts in AD and AS are demonstrated, as well as their impact on the inflation rate.
Changes in AD/AS Equilibrium Over Time
The presented graphs demonstrate the impact of inflation on the appropriate parameters of AD and AS. While assessing the situation comprehensively, one might remark that the most dramatic transformations in this sector occur when there are sharp economic fluctuations, and the Great Recession is a suitable example. According to Field (2022), a couple of decades before the collapse of the housing market, the level of inflation did not cause concern; in 2007, the situation began to change. The inflation parameter itself did not grow during this period and showed a decline.
The movement of AD to the right would indicate the improvement of the economic situation, including the level of employment and GDP. This would directly correlate with AS and encourage the economy to develop, shifting the equilibrium in that direction. Thus, the internal economic processes during the Great Recession largely depended on a number of factors and the degree of control over the relevant market trends.
References
The aggregate demand-aggregate supply model. (n.d.). Course Sidekick. Web.
Field, A. (2022). What caused the Great Recession? Understanding the key factors that led to one of the worst economic downturns in US history. Business Insider. Web.