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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 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

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