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Solving Economic
Problems
FDR
Fiscal Policy
Taxes
Government Spending
GDP
Aggregate Demand
Aggregate Supply
Budgets
Keynesian Economics
 What
Caused the Great
The
Depression?
Economic  When did this economic
Conditions
problem occur?
of the Great  Who was impacted?
Depression
 Jobs?
 Production?
 GDP?
 Value of the dollar
(CPI)?
What Caused the Great
Depression?
Understanding the Aggregate
Demand and Supply
Classical economists held that the
economy (market system) would
automatically adjust during times of war,
severe drought, depression, etc.
 For example: Economic slump would lead
to lower prices; people would begin buying
again; and the economy would recover.
 The Great Depression would test this
theory of self-adjustment.

Understanding the Aggregate
Demand and Supply
Keynesian Economics stood on the
principle that government intervention was
needed during such severe interruptions in
the marketplace.
 Without intervention, the economic
conditions could worsen, and the market
could collapse.
 To understand this, we must understand
the Aggregate Demand /Supply model.

AS
A measure of the price level
Price
AD
Real GDP
A measure of the output of
final goods and services.
AS
A total of final
goods and services
supplied by the
American economy
Price
AD
Real GDP
A total of the measure of the output
of final goods and services
demanded by the American
economy
What happened to Aggregate Demand during
the Great Depression?
What causes a
decrease in AD?
AS
Decrease in
Consumer Wealth
Price
AD1
Real GDP
Increased Taxes / Decreased
Government Spending
AD
Decrease in
Consumer
Expectations
Increase in
Household Debt
Decrease in
Investment Spending
What happened to Aggregate Demand during
the Great Depression?
AS
Price
AD1
Real GDP
AD
AS
Price
AD2
Real GDP
AD
AD1
Expansionary Fiscal Policy
Increase
Government
Spending
 Tax Cuts

AS
Price
AD2
Real GDP
AD
AD1
Contractionary Fiscal Policy
Decrease
Government
Spending
 Increased Taxes

AS
Price
AD2
Real GDP
AD
AD1
FDR’s Response
Increased
Government
Spending
 The New Deal
 Defense
Spending
 World War II
 Increases in
spending
allowed for
increased AD.

AS
Price
AD2
Real GDP
AD
AD1