1. Your mission is to analyze the macroeconomic effects of one of three historical macroeconomic episodes (data on back): (1) a negative demand shock (an unanticipated shift of aggregate demand to the left/down), (2) a positive demand shock (an unanticipated shift of aggregate demand to the right/up) or (3) a negative supply shock (an unanticipated shift of short-run aggregate supply to the left/up). I will let you know which one you are responsible for and who your teammates are.
    2. Begin your work with a careful reading of the Supplementary Reading selections by Baumol and Blinder, Chapter 10, "Supply Side Equilibrium: Unemployment and Inflation" and Gwartney and Stroup, Chapter 13, "Aggregate demand and aggregate supply."
    3. Get together with others in your group to discuss your episode, following the the same analytical steps outlined in the class handout "The Korean War Years":
    a. Illustrate in an AD/AS diagram the U.S. macroeconomy in the initial year of your particular episode.
    b. Impose your assigned shock, and predict its impact for the variables listed. Also, compare your predictions with the second year assigned for your episode, and illustrate the second-year data in your diagram.
    c. Illustrate the relevant recessionary or inflationary gap that results from the shock, and predict and explain how the self-correction mechanism is supposed to work to reduce or eliminate the gap (this is where the Baumol and Blinder reading is especially helpful). Use your analysis to predict how the self-correction mechanism would change the data, and compare your predictions to the actual changes from the second to the third year assigned for your episode.
    d. Conclude with an overall assessment of how well the macro-model works in interpreting your episode. In particular: (1) were the predictions of the particular shock consistent with the data in the second year, and (2) were the predictions for the data for year 3 from the workings of the self-correction mechanism consistent with the actual results in the third year? It is crucial that you do one more thing in your assessment: (3) consult some of the additional data in the "Economic Indicators" tables accompanying this exercise and "speculate intelligently" about the reasons why the predictions from the self-correction mechanism were not always realized in your third year of data. For example, it might be that fiscal and/or monetary policy was changing over this period and we haven't explicitly taken such changes into account. Or, perhaps some of the model's assumptions were unrealistic, or other variables not explicitly considered in our model (such as the size of the labor force) were changing, etc. Try to find reasons that are consistent with year 3 of your episode.
    4. With your teammates, be prepared to present your analysis of your assigned episode to your classmates on Friday, November 18. Limit your presentation to 12-15 minutes.

YEAR	Real GDP  (billion 1987 dollars)	GDP Deflator  (1987=100)	Potential Real GDP  (billion 1987 dollars)	Unemployment   Rate (percent)
Episode 1: Negative Demand Shock
1929	821.8	12.5	885.9	3.2
1933	587.1	9.5		24.9
1937	811.4	11.2		14.3
Episode 2: Positive Demand Shock (episode used in class as example)
1949	1305.5	19.9	1603.9	5.9
1953	1685.5	22.0		2.8
1954	1673.8	22.2		5.4
Episode 3: Positive Demand Shock
1965	2470.5	28.4	2738.7	4.4
1969	2873.0	33.4		3.4
1970	2873.9	35.2		4.8
Episode 4: Negative Supply Shock
1979	3796.8	65.5	4026.7	5.8
1982	3760.3	83.8		9.5
1984	4148.5	91.0		7.4
Sources: All but the data for potential Real GDP are from James Gwartney and R. L. Stroup, Introduction to Economics: The Wealth and Poverty of Nations, (Harcourt Brace) 1994, Appendix B. Data for potential Real GDP are based on data from Robert Gordon, Macroeconomics, 1990, Appendix A. (Gordon's 1982 base year GDP deflator has been adjusted to 1987.)