Review of U.S. Economy - 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 Trillion
- Largest “nation” in the world, followed by China ($1.34 trillion)
- Note: EU GDP = $20 Trillion
- US Population: 310 million
- US 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 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 time
- Post-war (1947-2010) growth: 2.3%
- Comparison? High or low? Why? See textbook
- Convergence hypothesis: relatively low for rich (developed) countries, high for many poor but emerging (developing) countries
What if we take the trend out Short-Run Fluctuations (business cycle) So, you see positive & negative gaps - Inflation generally decreased in a recession
Unemployment generally increased in a recession - What should the government AUTHORITY do in a recession?
- Federal government: Fiscal policy (Ch.13)
- Central bank (Fed): Monetary policy (Ch.16)
Fiscal Policy - Great Recession: Dec. 2007 and June 2009
- Output declined substantially after the collapse of Lehman Brothers in Oct. 2008
- January 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 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 falls
- Unemployment rises
- The Fed can raise the money supply, so…
- Fed funds rate/discount rate will fall
- Other interest rates will fall
- Investment/consumption spending will rise
- Production (GDP) will rise
Is there any downside? - Remember: we are talking about only the short run so far
- In 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 Sector - Foreign exchange & trade (deficit), Ch. 33-34
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