In this activity, you will apply your knowledge from this unit to a macroeconomic scenario. You will apply your understanding of aggregate demand and supply, fiscal policy and monetary policy to an example country. You will creatively come up with a solution to this countrys problems and justify your answer using concepts from this unit.

Part 1: The Watch Industry

Stickmanland is a country with a population of 1000 people. The GDP of Stickmanland is $800000 this year.

The economy of Stickmanland is driven by the watch industry. Stickmanland produces the best watches in the world, but it does not trade any to other countries.

The watch industry is a perfectly competitive market, with 1000 different companies making and selling the exact same watches. Each company produces 800 watches per year, since they take a very long time to make.

Every person in Stickmanland spends all of their money on watches (that is why everyone is so skinny), in this economy money is split equally amongst all the people, so the GDP per capita determines how much money each person has.

1. 1) What is the GDP per capita in Stickmanland this year? How does GDP per capita

reflect the quality of life in Stickmanland? [K]

2. 2) If one watch costs $500, what is the aggregate demand for watches in

Stickmanland? Would a change in the cost of watches result in a change in aggregate

demand? How [K]

3. 3) What is the aggregate supply for watches in Stickmanland? Does Stickmanland

produces too many or too few watches to meet the current demand? How would the market correct for this? [K]

Part 2: Monetary and Fiscal Policy Decisions

Stickmanlands economic goals include an unemployment rate of 5%, an inflation rate anywhere from 2%-4%, and a GDP growth rate of 4% per year.

Last year, Stickmanlands economic indicators concluded as follows: o Inflation Rate: 1%

o Unemployment Rate: 9%

o GDP Growth Rate: 1.5%

1) What stage of the business cycle do you think Stickmanland is in currently? How can

you tell? [K, C]

2) What fiscal policy could the government of Stickmanland implement to help the

country reach its economic goals? [A, C]

3) What monetary policy could Stickmanlands central bank use to help the country

reach its economic goals? Does this monetary policy work well alongside the fiscal policy you suggested in question 2), or do the two policies conflict with one another? Explain. [T, C]