Economics

The falling global economy had number of causalities. One country had it banking system collapse here and another had its mortgage ravaged there. Iceland, though had the signs of economic stagnation prior to the onset of the global economic crisis, witnessed the global economic meltdown sooner and heavier than any other economy.

The banking system of Iceland collapsed in autumn of 2008. This just happened at the very time the global financial crisis was eating into most of the economies world over. The assets in the Iceland economy evaporated and the value of the Krona plummeted. Similarly, the interest rates increased relatively. The general financial activities in the market went into disarray. Companies become bankrupt fueling unemployment. This further contracted the domestic demand of Iceland.

The goings-on in the economy of Iceland trigger an immediate analysis of the macroeconomic variable with an aim of addressing the simmering macroeconomic challenges. The variables analyzed included the employment levels and the general consumption of the citizens. The bank interests rates were similarly analyzed to interpret their effect on the performance of the economy. The aggregate demand and aggregate supply were utilized in this analysis. In this paper it is assumed that the economy is a two sector, holding one of the variable constant through the analysis.

Discussion
The Iceland economy is a three sector economy with its equilibrium being attained at a point where the goods, labor market and money markets are at equilibrium. Aggregate Demand curve combines the price and output at which the goods market and the money market are at equilibrium. This happens where there are two sectors in the economy. The introduction of the labor market is done through the use of the aggregate supply curves. The prices of goods in the market affect the real wage of the consumers unless the increase in price is accompanied by a proportionate change in the income.

It need be noted that the aggregate demand has a direct effect on the quantity of goods demanded from the market. Subsequently, a production function helps in the determination of output. AD shows the effect that price will have on output. It is a derivative of the equilibrium in the financial and goods market. The economy of Iceland saw the upsurge of unemployment by an average 9.0. This had a direct effect on the demand of goods. Similarly, it affected the money demand as most consumers had no projected income therefore could not take loans.
 
Inflation surged tremendously at the same time to an average of 12.7. This further affected the marginal propensity to consume of the citizens. This translated to a decrease in the consumption and consequently into a reduction in the Aggregate demand.

With the increase in inflation, the price of the goods in the Iceland economy increased, the demand of the goods dropped from y0 to y1 this has a direct effect on the aggregate demand unless the income of consumers increases proportionately.

The economy of Iceland was undergoing such a state with the aggregate demand dropping relatively fast. This had a direct impact of the level of employment. The companies had to lay off employees to meet their tentative running costs.

The aggregate demand of Iceland dropped from y to y. this is as a result of the fall in the real income relative to the prices in the market. The subsequent increase in the nominal money stocks becomes proportional to the prices, leading to a higher money supply.
The quantity supplied is largely dependent on the labor. Besides, this supply is largely dependent on technology, amount of capital, the efficiency of production, and the support from institutions. The changes in the output will always be triggered by the changes in the aggregate demand. This subsequently affects the other factors of production.

The increase in unemployment makes the employers to reduce the wage bill of employees. This subsequently hurts the marginal propensity to consume of the citizens as a result of the decrease in their incomes or worse still, lack of income at all allowing consumers to consume at b0, in the consumption function
where,   C- Consumption, b0 -Autonomous consumption,
m- Marginal Propensity to Consume,
Yd- disposable income

This has a general influence on the welfare of consumers and their respective per capita income, implying a decrease in the economic development of the economy.

Consequent to this, at the end of 2008, the revenue of the treasury contracted in Iceland. This resulted into a deficit of 1.2 in Gross Domestic Product. This resulted from the souring consumption trend. At the beginning of 2009 the Gross Domestic Product further contracted to 12.6 of the GDP.

In general, to address the economic crisis in Iceland the government will have to address the macroeconomic variable through pumping money into the economy to encourage both domestic and foreign investment. This would include lowering the lending rates to encourage borrowing that may translate into increased investments through the multiplier effect, employment will be created. Increased employment will trigger increase in consumption and consequently the national income.