Economic Policy and Personal Decisions Research Paper

Economic Policy and Personal Decisions - Research Paper Example In the long run equilibrium, the economic growth is dependent on three factors the growth in labour force, amount of capital available to the workforce, and the rate of technological advance. If we consider, an economy where the aggregate demand is due to an increase in spending, Cashell observes that this demand can be satisfied by either raising the prices or increasing real production. If the economy is operating at full employment, and the stock is at full capacity then an increase in demand is met by an increase in the prices of available goods and services. Cashell states that, for a fully employed economy, increased government spending does yield an increase in the nominal GDP (2005). Let us consider the wage. This forms a main element of cost in the economy of any country. A higher wage rate does translate into a higher cost this means a less profit will be incurred at any given price. A squeezed profit for any company means a cut back on production. A wage increase in any ec onomy would mean a decrease in the number of goods and services supplied at a constant price. During a recession, the economy is a short-run equilibrium. In such an environment, it is difficult for the wages to be increased; however, this can be counteracted by a fall in prices, and thus the recessional gap can be seen as shrinking. This led the economy to equilibrium at full employment. Cashell concludes that if wages and prices fall unusually slowly then it is possible for the economy to endure a prolonged period of production below potential GDP (2005).