1. Aggregate Supply/Aggregated Demand in the Great Depression

Price Level

GDP

U.S. IN 1930S

a. (2 pts.) Draw the model of aggregate supply/aggregate demand in long-run equilibrium on the graph above. Include: 1) an aggregate demand curve (AD), 2) a short-run aggregate supply curve (SRAS), and 3) a long-run aggregate supply curve (LRAS). Label all curves as well as the equilibrium level of GDP (Y*) and price level (P*). 


b.(2 pts.) In 1929, the crash of the New York Stock Exchange (an asset price crash) led to a loss in wealth in the United States. Due to this, consumption decreased, shifting the AD curve to the left. List two government policies which pushed the AD curve even further to the left. 
1) 2) 


c. (1 pt.) How did the Roosevelt Administration use monetary and fiscal policy (as we define them today) to shift the AD curve back to its original level?

d. (3 pts.) Suggest another way the economy could have returned to the original, long-run level of GDP. Draw this on the graph, labeling any curves and price level/GDP outcomes. How did Roosevelt’s policies hinder this (answer below)?

2. Some of the Roosevelt administration’s policies involved raising output prices for struggling industries, as with the AAA (Agricultural Adjustment Act) and the NIRA (National Industrial Recovery Act).

a. (3 pts.) Draw the market for agricultural goods (food) with any price distortions created by the AAA. Clearly label any relevant prices, the quantity demanded and the quantity supplied.

b.(1 pt.) Name a group that could have been adversely affected by the AAA. (Hint: look at your graph above and think of who would be affected). 


c. (2 pts.) The NIRA was not fully implemented due to a political struggle which Roosevelt lost. How were the events surrounding this critical to the U.S. government (and economy) today? Hint: Think in terms of our discussions on how institutions or “rules”, such as the Constitution, have affected economic growth. 


3. Agriculture

a. (2 pts.) U.S. agriculture can best be described as a competitive market. Draw the market for corn for a single U.S. farmer with the demand curve representing only demand for this firm’s output. Draw a marginal cost curve and an average total cost curve consistent with a long-run equilibrium in a perfectly competitive market.

b.                 

Corn (Single Firm)

b.(2 pts.) On your graph above, shift the appropriate curve(s) consistent with agricultural prices during WWI. Note that this will not be a long-run equilibrium. Label any profits or losses. 


c. (2 pts.) On the graph below, draw what happened to the entire market for an agricultural product, such as corn, in the decade following WWI (the 1920s). You should start with a market in equilibrium during WWI and then shift the appropriate curve(s) consistent with what occurred in the 1920s. Hint: The demand curve in this case is the entire market demand curve, so a substitute for corn would have to be something that is not corn, whereas in the previous (single-firm) graph, a substitute was just corn from any other farmer. 


 

b.                 

Corn (Entire Market)

d. (1 pt.) How did the agricultural sector adjust towards a new long-run equilibrium during the 1920s and then again during the Dust Bowl (1930s)?

4.                (2 pts.) List two groups with which American high-school dropouts would compete in the world economy. 


1) 


2) 


5.                (2 pts.) Labor force participation in the United States rose significantly in the decades since WWII, especially in the 1970s and ‘80s, peaking around 1990. Since then, it has decreased slightly. Give the main reason for the increase and one reason for subsequent decrease. 
Increase in 1970s & ‘80s: 
Decrease since 1990: 


 

 

Attachments:

• 1504702892-HW ECON.docx