Impact of 9/11 Attack on AD
The attack of 9th September, 2001 was an unbelievable shock for US people and for all over the world as well. This attack also has affected macroeconomics at large as it has impacted both aggregate demand and supply model at one time. After this attack the demand was largely influenced by two factors, change in every component of demand and in macroeconomic policies. This event has impacted majorly in three ways; firstly it reduces actual consumption for travel, hotels, entertainment, and luxury items. Secondly, a decline in consumer confidence that results decrease in demand at all levels. Third impact was a decline in business confidence that results reduction in investment at the huge level (Andreopoulos & Panayides, 2004). These all impacts have shifted the demand curve from left to right that shows a vast reduction in employment rate as well. Due to this event, the interest rates were falling down and the government has taken the decision of making less spending over public events as compared to previous (McEachern, 2010).
Effect on Equilibrium Price Level
Equilibrium price level refers to the situation where supply and demand runs at similar level. Due to this level organizations can set such price for the product through which it can attract customer effectively and can earn enough profit as well. In the attack of 9/11, a huge number of human losses were tolerated by US economy. This loss has affected both demand and supply negatively. As per the fear of spending in people the supply of products fallen down and due to this demand suffered as well. Such impact on supply and demand affects price level equilibrium at large. The imbalance in price level affects the whole corporate world at vast level. After the attack of 9/11, the price of products cannot be set at such level where organization can earn their profit with cost (Makinen, 2011). Also, the equilibrium price level gets affected as the market was suffering with the confusing situation to set the price of the product so that customers can be attracted easily and the profit can be earned as well.
Effect of Fiscal Policy Tools to Stabilize Economy
Fiscal policy refers to the government spending policy that influences macroeconomic conditions. Fiscal policy includes two main tools such as the area government expenditure and taxation. With this tool the economic imbalance situation can be controlled by interest rate and money supply. In the situation of terrorist attack, where aggregate demand and supply model and equilibrium price level has imbalanced, there government is the only entity that can control the situation with some steps. In this concern, with the change in level and compensation of taxation and government spending the control can be possible (Garfinkel & Skaperdas, 2012). As the 9/11 attack influence a shift in aggregate demand from left to right so in this concern increment in government spending and decrement in tax rates is the best efforts to simulate.
Example of a Built-In Stabilizer
Automatic stabilizer is the tool through which a country can control demand and supply model even in an economic downturn situation. Through this tool government doesn’t need any new legislation to impose new rules regarding tax and interest rates. This is the results of net taxes, which help to change GDP rates at the vast level. With the assessment of this tool, US government has shifted the demand curve to the left again which was shifted after the attack of 9/11. The increase in tax rates and a decrease in government spending was the decision that has taken under this automatic stabilizer (Yartey, Narita, Nicholls & Okwuokei, 2012).
- Andreopoulos, G.C. & Panayides, A. (2004). The Macroeconomic Effects Of 9/11. Journal of Business & Economics Research, 2 (10).
- Garfinkel, M.R. & Skaperdas, S. (2012). The Oxford Handbook of the Economics of Peace and Conflict. Oxford University Press.
- Makinen, G. (2011). Economic Effects Of 9/11: A Retrospective Assessment. DIANE Publishing.
- McEachern, W.A. (2010). Macroeconomics: A Contemporary Introduction. USA: Cengage Learning.
- Yartey, C.A., Narita, M., Nicholls, G.P. & Okwuokei, J.C. (2012). The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean. International Monetary Fund.