Brac actions

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 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

• 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 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

What happens in the business cycle

• Inflation generally decreased in a recession

Unemployment generally increased in a recession

Policy Question

• 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