Assignment:
The chapter provides numerous real-world examples illustrating how macroeconomic policies have been used in the past to manage the economy. This all really began with the Great Depression in the 1930's. This is the event that motivated economist John M. Keynes to develop the new approach emphasizing government involvement and problem-solving. In a nutshell, government can cause AD to shift to the right by stimulating spending. How? One way is to give people tax cuts, counting on the fact that people will usually spend more if they have more to spend. Another way is for government to pay for new programs, like construction jobs (highways, bridges, etc.) or expanding the military. These examples illustrate fiscal policy, which we will be looking at in more detail during this class. Are there any interesting policy examples from the reading that you would like to discuss?
The Keynesian model focuses on short-run analysis. In the short run, the aggregate supply curve is upward sloping, so doing aggregate demand/aggregate supply analysis is very similar to doing demand/supply analysis (from week 1). The most important difference is the interpretation. A rightward shift of aggregate demand (AD), for example, causes the economy's price level to increase, whereas a rightward shift of demand only causes the price of one specific product to go up. Likewise, when AD shifts right, the new equilibrium quantity means a higher level of output for the entire economy rather than just an increase in output for one market. The mechanics are similar, but we interpret everything on a larger scale in macroeconomics.
Using the short-run version of the AD/AS model, what happens to the price level, output, and employment when AD shifts to the left?
Read about the five sources of economic growth in this chapter. Choose one and discuss it in more detail. Think about what it takes for society to achieve economic growth in real-world terms. Does the U.S. economy do a good job of promoting economic growth, in your view?