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Real Gross Domestic Product (GDP)
You’ve provided a thoughtful perspective on the effort of the government to fund shovel ready projects during the recession. How would you describe it in terms of the AS-AD model, either in its intention or in the actual outcome?
Please help!! Doesn’t need to be more than 2 paragraphs, Thanks!!
The real Gross Domestic Product (GDP) is the value of an economy’s total output adjusted for fluctuations in the prices due to inflation. The real GDP had its lowest point in 2009 of the last eight years. Pre-financial crisis in 2007 had its highest level at 1.8% with a below par rate of -0.3% and -2.8% in 2008 and 2009 respectively. The post financial crisis had the economy hit its highest ever real GDP growth rate of 2.5%. The economy having witnessed a downward trend in 2011, it has continued to rise since 2012 till up to date (Horton & El-Ganainy, 2016).
The period between 2007 and 2010 witnessed a flop in which the economy dropped. The economic growth sunk to below 0% at -0.3% in 2008 and -2.8% in 2009. This signifies that there was little growth in the factors of production which ultimately set in a recession. However, the period past 2011 in which the economy has consistently been performing well can be termed as a boom (Worstall, 2016).
The shovel projects were not a wise move with regards to the interaction of aggregate demand (AD) and aggregate supply (AS). The shovel project was a fiscal stabilizing project at the height of the global financial meltdown, which did not factor in the effect on inflation. The situation was already bad with inflation, of which adding more money into the economy meant that there was a sudden change in the short run aggregate supply. Supplier’s expectations of goods selling at higher prices, would have further increased due to government increased spending. As a result, they were not willing to sell to the market, creating an aggregate supply gap. In the same case, the aggregate demand was affected, in that the supplier’s failure to promote the goods in the market lead to a deficit. There will more consumer need for the goods than before. In essence, the shovel projects created more problems than there were before because it increased the price of the goods to already highly fixed inflation. It meant bad future prospects if it were to go on.