Contrast the economic performance of the American economy of 2001 with the economic performance of the 1996 to 2001 period. Use the appropriate aggregate demand and aggregate supply curves to distinguish the differing economic condition of the two periods.

What will be an ideal response?

The economic performance of the 1996 to 2000 period could be characterized as a fortuitous combination of increasing aggregate demand at the same time the aggregate supply curve was shifting out as well. This created both economic growth and a fairly stable price level. The American economy experienced both low inflation and decreasing rates of unemployment. The year 2001 represents a classic aggregate demand-caused recession. A decrease in investment spending caused a decrease in aggregate demand. This caused a decrease in output and employment while putting downward pressure on prices. The American economy suffered the usual effects of recession, proving that the United States is not immune from the normal vicissitudes of the business cycle and that the United States had not entered a “new paradigm.”