ME_Group 2 Sec E

8/8/2019 ME_Group 2 Sec E

1/40

[MACROECONOMICS][MACROECONOMICS]

United States 2001recession and policy

measures using the IS-LM model.

:ubmitted by/ /PGP 14 260NITESH KUMAR GUPTA / /PGP 14 280 / /MAHTAAB KAJLA PGP 14 287 PRA

CHAWLA/ /PGP 14 290 RAHUL MITTAL / /PGP 14 303 SHRUTI KABDAL / /PGP 14 313 VINNY ARYA/ /PGP 14 315 VISHAD DUBEY

roup II


2/40

AGENDAAGENDA

, Group II | Indian Institute of Management Kozhikode | Macroeconomics

ecession - definedThe S 2001 recession

Understanding the -S LM ModelApplication of the model iscal and Monetary Policy

Measures

&iscal &iscal onetaryonetaryolicyolicymeasureseasures

S 2001S 2001recessionecession-S LMS LM odelodelunderstandingnderstanding

Recessionecession


3/40

Recession DefinedRecession Defined

,In macroeconomics arecession is a decline in a

country s gross domestic( ),product GDP or negative

,real economic growth fortwo or more successive

quarters of a year



4/40

Current Contribution of USCurrent Contribution of US



5/40

HistoryHistory

Jul

80

No

v82

2years

total

Jul

90

Mar

91

8months

Mar

01

Nov

01

8

months

Dec

07

Ju

n09

19

months



6/40

HistoryHistory



7/40

Causes of RecessionsCauses of Recessions

Currency Crisis

A urrency crisis , whichis also called a -alance- ,f payments crisis

occurs when the value of a,currency changes quickly

undermining its ability toserve as a medium of

exchange or a store of.value

It is a type of financialcrisis and often

associated with a real

.economic crisisAsian crisis of 1997



8/40


Energy Crisis

An nergy crisis , is anygreat bottleneck in thesupply of energy resources

.to economy It usuallyrefers to the shortage of

oil and additionally toelectricity or other

.natural resourcesAn energy crisis may be

referred to as an il,risis petroleum,risis energy,hortage electricityhortage orlectricity crisis

1973 oil crisis



9/40


Financial Crisis

The term inancial crisisis applied broadly to a

variety of situations inwhich some financial

institutions or assetssuddenly lose a large part

.of their valueSubprime crisis of 2007



10/40


Overproduction

,In economics verproduction refersto excess of supply over

demand of products being.offered to the market

This leads to lower prices/and or unsold goods

Canadian crisis of 1920s



11/40


Under consumption

In ,nder consumptionrecessions and stagnation

arise due to inadequateconsumer demand relative

to the amount produced1930s US crisis



12/40

US ECONOMIC RECESSION 2001US ECONOMIC RECESSION 2001

What led to it??


!...Y2K SCARE THE DOT COM BUBBLE

NASDAQ COMPOSITE INDEX


13/40



!...Y2K SCARE THE DOT COM BUBBLE

High interestrate by the

Federal Reserve

limiting liquidityavailable forinvestments and

procuring cheapbusiness loans

and mortgages

Steep rise inthe stock marketin 2000 followed

by a steepdecline leadingto a

recessionaryimpact


14/40



High Deflationary Impact leading to decline in Investments


15/40


What led to it??


CORPORATE SCANDALS

The company which was No 7on the Fortune 500 s list

worth more than 60 billion

$ filed for bankruptcy inDecember 2001


16/40


What led to it??


/9 11


17/40


What led to it??


.NATURAL END TO ECONOMIC CYCLE


18/40



Impact on the US Economy

:Source US Bureau of Economic Analysis


19/40



Impact on the US Economy

:Source US Bureau of Economic Analysis


20/40



-

USA N

etForeig

nDebto

r

Hig

hco

nsum

erde

bt

H

ighlevels

ofunemploym

ent

Low

householdsavings

%More than 40.of U Shouseholds

have less than$1000 inliquid assets

and more than%65 have less

than $5000 inliquid assets

.2 1mn peoplelost jobs as

unemployment. %rose from 3 9

. %to 5 8

Pressure onnational

currency

The average. .U S householdhas $8000 in

credit carddebt


21/40

The Goods MarketThe Goods Market

Demand is an increasingfunction of output

An increase in output leadsto an increase in incomeand also to an increase in

.disposable incomeAn increase in output also

leads to an increase in.investment



22/40

IS RelationIS Relation

The higher interest rate iimplies a lower level of

outputThe IS curve is downward

.slopingRelation between the

interest rate and outputis represented by thedownward sloping curve



23/40

Shifts of the IS CurveShifts of the IS Curve

Increase in taxes shifts theIS curve to the left

,Decrease in demand for goods,given the interest rate

shift the IS curve to theleft

Increase the demand for,goods given the interest,rate shift the IS curve

.to the right



24/40

Deriving the LM CurveDeriving the LM Curve

, ,An increase in income leads at a given interest rate to an increase. ,in the demand for money Given the money supply this increase inthe demand for money leads to an increase in the equilibrium

.interest rate .increase in income leads to an increase in the interest rate ,In equilibrium the real money supply is equal to the real money

, , , ,demand which depends on real income Y and the interest rate i



25/40

Shifts of the LM CurveShifts of the LM Curve

An increase in the,level of income

leads to anincrease in the

.interest rateThis relation is

represented by the-upward sloping LM.curve

An increase in themoney supply shifts

;the LM curve downA decrease in the

money supply shifts

.the LM curve up



26/40

IS-LM ModelIS-LM Model

,Only at point A which,is on both curves

are both goods andfinancial markets

.in equilibrium



27/40

IS-LM ModelIS-LM Model



28/40

Fiscal PolicyFiscal Policy

:Fiscal Policy changes are effected through



29/40


Change in Government Spending


Y

LM

Y1

r1

r

IS1

rease .in government purchases shifts the IS curve to the right

IS2

r2

Y2And the income

The IS curve shifts to the right byG

(1-MPC)

Which raises the interest rate


30/40


Change in Tax Rates


Y

LM

Y1

r1

r

IS1

A ecrease in tax rates shifts the IS curve to the right

IS2

r2

Y2And the income

The IS curve shifts to the right byMPC *T(1-MPC)

Which raises the interest rate


31/40


32/40

Fiscal Policy MeasuresFiscal Policy Measures


Increased spending


33/40

Monetary PolicyMonetary Policy


Monetary policy aims to shorten recessions by encouraging


34/40

Monetary Expansion PolicyMonetary Expansion Policy



35/40


36/40

Effects of Monetary PolicyEffects of Monetary Policy


: .Source www.tradingeconomics com


37/40

What happened in 2001What happened in 2001


Decrease in investmentdemand led to a sharp

shift of the IS curve to, the left from IS to IS

Increase in the money supplyled to a downward shift of,the LM curve from LM to

LMThe decrease in tax rates

and the increase in

spending both led to ashift of the IS curve to, .the right from IS to IS


38/40

ReferencesReferences


Wikipedia The OnlineEncyclopedia

:// . . / /http www imf org external datamapper/ .index php

:// . . /http www tradingeconomics com unite

- / /d states indicators . About com US Economy . .www tradingeconomics com , ,Macroeconomics 4th ed By Olivier

Blanchard

Bureau of Economic Analysis ,San Jos State University

Department of Economics


39/40

Q & AQ & A



40/40

The recession started upon my arrival. It could have beensome say February, some say March, some speculate maybe

earlier it startedbut nevertheless, it happened as we showedup here. The attacks on our country affected our economy.Corporate scandals affected the confidence of people and

therefore affected the economy. My decision on Iraq, this kind ofmarch to war, affected the economy.

| |

.George W Bush

Date post:	09-Apr-2018
Category:	Documents
Upload:	spamjammer
View:	215 times
Download:	0 times

ME_Group 2 Sec E

Documents