In this question, you are going to study negative demand shocks such as the stock market crash of 1929. The stock market crash of 1929 occurred on October 29th 1929, when millions of investors lost their lifetime savings in a single trading day. In the aftermath of this historic event (sometimes called the "Black Tuesday"), America and the rest of the industrialized world spiraled downward into the Great Depression (1929-1939).

part-a:Using aggregate demand and aggregate supply, illustrate the negative demand shock caused by Black Tuesday. How did Black Tuesday impact the aggregate price level, output, and the unemployment rate in the US?

part-b: In response to the economic devastation created by the Great Depression, President Franklin D. Roosevelt's government passed a series of legislations, labeled as the "New Deal" (https://en.wikipedia.org/wiki/New_Deal(Links to an external site.)). The main objective of New Deal policies was to combat unemployment. Unfortunately, New Deal wasn't impactful enough to get the American economy out of the Great Depression.

New Deal is an example of expansionary fiscal policy adopted to counteract against a negative aggregate demand shock. Illustrate the impact of the New Deal programs on the American economy using your aggregate demand and supply plot from part a.

part-c:On December 7th 1941, Empire of Japan launched a surprise air and naval attack on the Hawaiian Islands and in particular the Pearl Harbor Naval Base. The following day, on December 8th 1941, US entered the Second World War. In the following short video, you can watch President Roosevelt asking the congress to declare war on Japan: https://www.youtube.com/watch?v=lK8gYGg0dkE&ab_channel=WarArchives(Links to an external site.)

The Second World War (WW II) lasted between 1939 and 1945. During WW II, US didn't only fight against the Japanese Empire in the Pacific but also against the German Reich (ie: Germany under Nazi government) in Europe and in Africa. To combat on these two fronts, armament production had to greatly increase. As an example, at the peak of the war, naval shipyards in the US were producing a liberty ship every 42 days (For liberty ships, see: https://www.nps.gov/articles/liberty-ships-and-victory-ships-america-s-lifeline-in-war-teaching-with-historic-places.htm(Links to an external site.)).

Military production at this frantic pace required every available person to be employed somewhere in the supply chain. Hence, everybody that was left unemployed by the Great Depression (and couldn't be helped by the New Deal programs) was able to find a job.

Illustrate the impact of WW2 on the US economy using your aggregate supply and demand plot from part a.

part-d:Now suppose history had taken an alternative turn following the Great Depression. Suppose President Roosevelt's government had not launched the "New Deal" to help the economy or WW2 had not happened. How would the American economy return back to its initial equilibrium? Explain in words and using an aggregate demand and supply plot.