Question

According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream economists?

Short answer

According to mainstream economists, the usual cause of macroeconomic instability is price stickiness and unexpected shocks to either aggregate demand or aggregate supply.

The spending income multiplier multiplies the initial decrease, thereby creating instability.

The adverse aggregate supply factors decrease a nation’s aggregate supply, which destabilizes the economy by simultaneously causing cost-push inflation and recession.

Step-by-step solution

Causes of macroeconomic instability

Macroeconomic instability is generated in the short run because the input and output prices do not fluctuate in response to the changing aggregate demand and supply. The shock creates changes in employment and output, thereby creating instability. The spending income multiplier multiplies the decrease in the income spending and creates instability.

Spending-income multiplier creating instability

The spending income multiplier is a constant that multiplies the change in income spending. If the income spending decreases, the spending-income multiplier multiplies the decrease and creates a considerable decline in the GDP, which causes recession or instability.

Adverse aggregate supply

Adverse aggregate supply means a decrease in the aggregate supply, which can be caused by the key resources’ prices going up. The costly resources increase the cost of production. So, the aggregate supply decreases, and the output price rises to serve unchanged aggregate demand. The instability is viewed in the form of increasing prices and reduced output and employment.