Question

• Consumer spending during holiday seasons affects the aggregate demand (AD) in the economy. AD drastically declines during serious recessions. In 1939, with the U.S. economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. Explain what President Roosevelt might have been trying to achieve, using the model of aggregate demand and aggregate supply. Was the policy effective to increase AD?

Answer 1

Great depression is called great for a reason. Widespread unemployment ( close to 25%) and slowdown in economic activity greatly hurt the western world. The aggregate demand comprising of consumption demand, investment demand and government expenditure were significantly affected and hence quite low.
In order to stimulate the aggregate demand, there was a need to look at every possible way. A ray of hope was shown in the form of prolonging the thanksgiving week. By proclaiming thanksgiving a week earlier on 23rd November rather than the 30th, President Roosevelt had a plan to stimulate the aggregate demand by increase in the money supply and increase consumption demand.
Proclaiming thanksgiving a week earlier would lead to increase in consumption spending more and also there would be increase in the money supply in the economy which would not only contribute to increase in aggregate demand, but fall in interest rate (money supply and interest rates are inversely related). The fall in interest rate and increased consumption spending would increase the aggregate supply thereby making the process of recovering from depression for United States effective.
Although President's proclamation led to widespread controversy and opposition, it was effective in stimulating the aggregate demand.