Aggregate Demand and Supply

The Great Recession of 2007-2009 is often used to illustrate the impact of adverse economic cycles on key economic indicators. The Recession caused a sharp decline in the stock market, seriously affecting consumers’ purchasing power as reflected in the drop in real consumer spending by 1.9% in the year 2009. At the same time, the rate of unemployment rose to 10% (Hess, 2013). A major effect of the Recession is that it caused a leftward shift in the aggregate demand curve (Sexton, 2015), as shown in the figure below:

Source: https://courses.lumenlearning.com/wm-macroeconomics/chapter/growth-and-recession-in-the-as-ad-diagram/

As can be seen from the above figure, the economic crisis of 2007-2009 created a recessionary gap where there was significant decline in wealth. Consumers reduced their spending and consumption, choosing instead to save for the future since their confidence in the economy had dropped substantially. As stated by Sexton (2015, p.397), “both households and firms adopted a wait-and-see attitude”. One of the areas that were negatively impacted by this shift in aggregate demand was gross domestic product-GDP. It is reported that during the Great Recession, GDP dropped by more than 2% within a year (Sexton, 2015). This may be explained by the fact that consumer confidence or optimism declined notably during the period, thus lowering the quantity and value of output. Because of this, the government had no option but to take measures that would stimulate the economy. For example, money supply was increased as interest rates were lowered to stimulate investment (Sexton, 2015). Consequently, the aggregate demand curve embarked on a rightward shift, the effect being that GDP began increasing significantly.

References

Hess, P. (2013). Economic growth and sustainable development. Routledge.

Sexton, R. (2015). Exploring macroeconomics. Cengage Learning.

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