THE WORLD GAME OF ECONOMICS:  LESSON 3
Focus on Aggregate Demand & Aggregate Supply

NOTE:  It is highly recommended that you read over this entire lesson before you begin.

Preliminary Discussion:  The combined forces of Aggregate Demand and Aggregate Supply determine the level of output, prices, and employment for countries in the global economy.  Aggregate Demand (AD) is the amount of total spending on the part of consumers, businesses, government, and net exports at different prices.  Spending is inversely related to prices.  Aggregate Supply is the amount of output on the part of producers at different prices.  Production is directly related to prices.  The equilibrium level of output and prices for a given economy is where Aggregate Demand is equal to Aggregate Supply.

Aggregate Demand schedules will move to a different location whenever there is a change in one or more of the following variables:  consumer and business expectations, consumer wealth and/or indebtedness, taxes, interest rates, government spending, exchange rates, and economic activity in trading partner nations.

Aggregate Supply schedules will move to a different location whenever there is a change in one or more of the following variables:  cost of resources, technology and productivity, business taxes, and government regulations.

Aggregate Demand and Aggregate Supply schedules are constantly in motion.  Whenever either Aggregate Demand or Aggregate Supply change, the economy moves to the new equilibrium at the intersection of the two schedules.  This is what causes business cycles and fluctuations in output, prices, and employment for a given economy.

The role of economic policy is to observe the direction of economic activity and undertake steps to improve the country's overall economic performance.  Generally, the goals are to achieve full employment, price stability, and economic growth without excessive pollution.  Fiscal, trade, and monetary policy tools are used to achieve an acceptable balance of conflicting goals.

In The World Game of Economics you are the chief economic adviser to the leaders of the country of your choice.  You are in charge of economic policy.  The objective is to implement timely and appropriate economic polices to improve the overall economic performance of your country.  Good luck and have fun!
 

1.  Play The World Game of Economics to 100 points against up to six other countries that are either computer-managed (i.e., advised by Professor N. D. Cator) or Laissez Faire.  Note:  If you do not know how to play the game, then select "Tutorial" from the main menu first.  If you already know how to play, then select "New Game."

2.  You are the chief economic adviser to which country?  _______________________.
3.  How many other computer-managed countries are you playing against?  ________.

SOMETIME AFTER THE 3RD YEAR AND BEFORE THE 10TH YEAR COMPLETE THIS EXERCISE:

4.  Which year have you chosen to complete this exercise?  __________.
5.  Look at the Aggregate Demand and Aggregate Supply diagram below.  Assuming your economy is at E0 at the beginning of your turn, which direction is the Economic Indicator currently pointing:  (Circle One)

                                     E1     E2     E3     E4     E5     E6     E7     E8

6.  Which change or combination of changes in Aggregate Demand and Aggregate Supply does the direction of the Economic Indicator predict?  (Circle One)

+AD    +AD&+AS    +AS    -AD&+AS    -AD    -AD&-AS    -AS    +AD&-AS

7. Now click on ECONOMIC INDICATOR.  Did your country move in the direction predicted [_____] or did the Economic Indicator change direction[ _____]?

8.  Now click on CURRENT EVENT.  What was the Current Event?
 

9.  Which change or combination of changes in Aggregate Demand and Aggregate Supply did the Current Event cause?  (Circle One)

+AD    +AD&+AS    +AS    -AD&+AS    -AD    -AD&-AS    -AS    +AD&-AS    None

10.  COMPLETE THE GAME.  Print the final score and attach it to this exercise.

ANSWER QUESTIONS 11 – 15. (Circle the letter before the best single answer).

11. Stagflation is caused by:
(a) a decrease in aggregate demand.
(b) an increase in aggregate supply.
(c) a decrease in aggregate supply.
(d) an increase in aggregate demand.
(e) an increase in both aggregate demand and aggregate supply.

12. The principle cause of the Great Depression of the 1930's was:
(a) a decrease in aggregate supply, because resources had become more scarce.
(b) an increase in aggregate supply resulting in deflation.
(c) too many dollars chasing too few goods.
(d) not enough people to buy things, thereby causing a decrease in aggregate demand.
(e) a decline in aggregate demand on the part both consumers and businesses.

13. An increase in the minimum wage would:
(a) cause an increase in aggregate supply, so that prices would fall.
(b) cause an increase in aggregate demand and a decrease in aggregate supply, thereby resulting in an increase in the general price level.
(c) benefit all workers.
(d) cause a decrease in both aggregate demand and aggregate supply, so that the price level would remain stable.
(e) affect neither aggregate demand nor aggregate supply.

14. Hyperinflation  is caused by:
(a) an increase in aggregate demand and excessive increases in the money supply.
(b) a decrease in aggregate supply and higher interest rates.
(c) not enough money in circulation.
(d) an increase in aggregate supply as a consequence of technological change.
(e) rapid population growth.

15. If aggregate demand and aggregate supply increase simultaneously:
(a) production increases, prices will definitely fall, unemployment is unaffected, and there will be more garbage to contend with.
(b) production and prices do not change, but both unemployment and the amount of garbage increase.
(c) production decreases, prices and unemployment remain unchanged, and the amount of garbage decreases.
(d) production increases, prices may or may not change, while employment and the amount of garbage both increase.
(e) production remains the same, prices definitely go up, unemployment falls, and the amount of garbage stays the same.

End of Lesson 3

Note:  At the instructor's discretion, you will receive _____   possible points for this exercise.

Instructor's Option:  At the instructor's discretion, you may receive additional points according to the schedule below.

Examples:  If you play against 6 other countries and you place 1st, then you get 10 extra points!  If you play against 4 other countries and you place 3rd, then you get 6 extra points.  If you play against two other countries and you place 2nd, then you get 5 extra points.  In each case if you place last, then you get only 4 more points.

Winning Strategy Hints:  Winning strategy involves anticipating the Economic Indicator, playing your policy options efficiently, coordinating your range of policies, and using trade policy to prevent one country from getting too far ahead.  Consider your opponents’ options and try to anticipate their trade policies.  Keep in mind that computer managed countries tend to use trade restrictions, tariffs, and currency devaluations when they have high unemployment. Be careful not to get caught having too many inappropriate and useless options.  Discard policy gridlock and foreign policy conflict options as frequently as possible.  [You don’t want to be trapped in a Depression like the United States in the 1930s or caught like Germany in Hyperinflation in the early 1920s].  Study the probabilities that are provided in the instructions.  That will help you plan your strategy.
 

The World Game of Economics   (C) 1999 Ronald W. Schuelke   All Rights Reserved