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Review of U.S. Economy
Review of Macro Concepts
Unemployment (Ch. 7)Inflation (Ch. 7)GDP (Ch. 8)Economic growth & determinants (Ch. 9)Money, central bank & monetary policy
(Ch.15+)Macroeconomic policies (Ch. 16)Foreign sector & foreign exchange (Ch.33,
34)
How rich is the U.S.?GDP (nominal terms): $14.6 TrillionLargest “nation” in the world, followed
by China ($1.34 trillion)Note: EU GDP = $20 TrillionUS Population: 310 millionUS GDP per capita: $47,100 (China:
$3,500)Still, does $1 buy you the same amount
of g/s in China as in the US? PPP
US Real GDP, 1920-2010
TREND
Long-Term Economic Growth
Graphically: TREND in Real GDP (per capita)Mathematically, it’s the average % change in
real GDP per capita over a long period of timePost-war (1947-2010) growth: 2.3%Comparison? High or low? Why? See textbookConvergence hypothesis: relatively low for
rich (developed) countries, high for many poor but emerging (developing) countries
What if we take the trend outShort-Run Fluctuations (business cycle)
GDP Growth (%)
-6.00
-1.00
4.00
9.00
14.00
1947 1959 1971 1983 1995 2007
-500
-400
-300
-200
-100
0
100
200
300
400
500
19601963
19661969
19721975
19781981
19841987
19901993
19961999
20022005
2008
So, you see positive & negative gaps
What happens in the business cycle
Inflation generally decreased in a recession
Inflation (%)
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
1947 1959 1971 1983 1995 2007
Unemployment generally increased in a recession
Unemployment Rate (%)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
1947 1959 1971 1983 1995 2007
Policy QuestionWhat should the government
AUTHORITY do in a recession? Federal government: Fiscal policy
(Ch.13)Central bank (Fed): Monetary policy
(Ch.16)
Fiscal PolicyGreat Recession: Dec. 2007 and June 2009Output declined substantially after the
collapse of Lehman Brothers in Oct. 2008January 2009: Obama proposed the
American Reinvestment and Recovery Act, passed by Congress in February 2009 (Stimulus Package of $787 billion in gov’t spending & tax cuts)
Still running NOW!!See recovery.gov
Monetary Policy?See what the Fed did first…
Fed’s policy response in business cycles since 2000
Federal Funds Rate (%)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2000 2001 2003 2004 2006 2007 2009
Monetary Policy
Started policy easing (lowering interest rates) before the onset of each recession (2001 and 2007)
Too little too late? Not clear because we need to know what would have happened without the policy (the condition that we can never know)
What to do in a recession?
Spending (& GDP) generally falls in a recession
Inflation fallsUnemployment risesThe Fed can raise the money supply, so…
Fed funds rate/discount rate will fallOther interest rates will fallInvestment/consumption spending will
riseProduction (GDP) will rise
Is there any downside?Remember: we are talking about only the
short run so farIn the long run, the economy (long-term
economic growth) is determined by real factors (Ch. 9), not MONEY or government spending
In the long run, too much money leads to only inflation and too much deficit spending leads to a larger debt
Just a myth? Let’s see what happens if you try…
A tale of Zimbabwe
Money is sometimes evil
Foreign SectorForeign exchange & trade (deficit), Ch.
33-34Dollar Exchange Rate, Major Currencies (1973=100)
0
20
40
60
80
100
120
140
160
1973 1985 1997 2009