Using AD-AS model, discuss 5 macroeconomic policies that can be adopted for the

Question

Using AD-AS model, discuss 5 macroeconomic policies that can be adopted for the South African economy without increasing inflationary pressure in the country Using AD-AS model, discuss 5 macroeconomic policies that can be adopted for the South African economy without increasing inflationary pressure in the country Using AD-AS model, discuss 5 macroeconomic policies that can be adopted for the South African economy without increasing inflationary pressure in the country Using AD-AS model, discuss 5 macroeconomic policies that can be adopted for the South African economy without increasing inflationary pressure in the country

Explanation / Answer

The model of Aggregate Demand (AD) and Aggregate Supply (AS) can be seen as:

The AD refers to the total demand created in an economy as a whole of goods and services at a varied price level, over a period of time. This defines the willingness of buying the commodities, that a specific country is producing within its territorial borders. This demand can be through any desirable buyer like the domestic demands, foreigners etc.

Factors affecting AD can be seen as:

1. Income of the consumers: the population size and its income level respectively affect the demand made by them. the good income grouped population would demand more for goods and services than the low-income groups.

2. Future expectations: the speculated demand by the consumers of an economy make the demand for various commodities increase or decrease. when the prices are expected to rise in future the demand for it in the present increases and vice versa.

3.Investment Rates: the demand for consumer goods and capital goods vary. The concept of investment affects the demand for capital goods where more the interest rates more would be the demand for capital goods and vice versa.

AS refers to the total supply of various goods and services that suppliers in an economy are willing to supply at various prices in the market over a period of time. This phenomenon defines the production level in the economy and the market stability enabling.

Factors affecting AS in the market can be seen as:

1. the availability of the raw materials: the supply of any good or service is severely affected by the availability of its raw materials required for its production. If the materials are found easily at low cost then the products would be widely sold in the market without any constraints while if the prerequisites are hard to find or rare to get then the supply will be a constraint and also the prices would be affected.

2. natural calamities: if unfortunately there occur any calamities in the country like floods, drought, earthquake etc. this causes an instability in the production cycle and hence affects the supply immensely.

3.malpractices: the cause for supply constraint in the economy can be also due to malpractices that the citizens indulge in like hoarding( where the middlemen make a store of the goods produced and wait for the prices to rise for the sale).

In context to 'South Africa,' the model of AD-AS would better with the policies like:

1. Focus on Investments: the choice for investing in either capital goods industries or consumer goods industries must be made efficiently. The country can adopt the policy of establishing Capital goods industries in the first instance for establishing its base. this would enable the development of the consumer goods industries in the future for sure. For example Iron and Steel. such efforts would enhance the supply in the domestic territory making every good available for its consumers in the home country at affordable prices leading to enhanced demand as well. This solution will help the country as there are comparatively fewer capital investments in comparison to other countries.

2. Focus on the primary sector: the primary producers of an economy are the base for any production cycle as they provide raw materials for further productions. When the raw materials are secured at an initial level then further developments in the productions can be made easier. This action would make it easy for the producers to utilize the resources optimally at reasonable prices which would increase the supply. Also, the demand would be more if the goods are better manufactures and are in the market at satisfactory prices. The solution is effective in the country because it has more weight of the citizens in the agriculture.

3. Focus on preventions for natural calamities: the country must work for making policies which would focus on bringing solutions for avoiding natural destructions like drought which the country is very prone to. This effort would make a positive vicious circle enabling the demand and supply working to their highest efficiency.

4. Adoption of capital-intensive techniques: the country must focus upon more of capital-intensive techniques for enhancing its economy. Utilizing the available resources to their optimum level is the best that a country can do and with good population size, the human capital can be put to work easily. this effort would benefit from all sides by increasing skill developments of its workforce, enhancing the income levels by increasing employment. Such enhancements would at last lead to better supplies due to the efficient and effective utilization of the resources and increased demand due to better income levels of the population.

5. Focus on technological developments: the country must make improvements in its technological developments as well like the service sector which would enhance the capabilities of its educated workforce and would increase the production levels at a rapid size. This would lead to demand increase with goods and services as well available in the market at better price levels and quantity.

These could a few solutions for South Africa with respect to the AD-AS model without any increase or changes in the inflation rates as all the solution are aiming towards improving both the concepts, maintaining the balance in the economy.

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