Consumer spending during holiday seasons affects the aggregate demand (AD) in th

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?

Explanation / Answer

By prolonging the Thanksgiving week, Roosevelt wanted to boost the consumption demand, in an attempt to stimulate aggregate demand because consumption is a component of aggregate demand. Roosevelt assumed tha increasing the duration of festive season would increase consumption.

But this policy failed to increase AD. The reason was, the weak consumption was a result from lack of income and unemployment. If there is no money supply or income available in the country, public manages their budget by curtailing non-necessity or luxury goods consumption, in order to be left with enough money to buy food and basic necessities. Festive consumption would have been stimulating the AD had it been implemented during robust economic growth. Therefore, consumption demand did not increase by the desired magnitude and weak consumption failed to stimulate AD.

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