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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.?. - PowerPoint PPT Presentation

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  • Review of U.S. Economy

  • Review of Macro ConceptsUnemployment (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, 1920-2010TREND

  • Long-Term Economic GrowthGraphically: TREND in Real GDP (per capita)Mathematically, its 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)

  • So, you see positive & negative gaps

    Chart3

    0-219.6913534542

    0-247.1382503304

    0-180.3430423313

    0-152.7606740442

    0-82.1487645798

    13.33230821970

    121.27932091970

    103.59611489930

    165.24350393460

    168.13917887370

    61.32760930930

    71.29994215610

    157.04389703480

    269.24365836150

    119.12976404030

    0-21.3910093489

    71.88423502240

    140.80439207520

    260.1342288210

    268.85425439260

    102.66058598250

    73.39481056040

    0-193.3561577627

    0-128.3302248626

    86.70973163920

    146.5457058370

    170.42440207470

    190.00706839490

    259.71932474490

    294.35098577310

    214.92587804620

    0-14.2483484882

    0-2.2004149762

    0-37.1956142543

    27.29398223770

    0-22.3306889712

    21.2840964690

    134.31462365060

    227.88950417930

    353.05943457020

    412.59694703780

    190.19615243850

    42.97247512010

    0-19.8176205776

    29.84308756720

    8.43228866530

    0-31.932161438

    0-159.5425497689

    0-399.3216255776

    Sheet1

    yearrGDPNGDPUinflationrGDPTGAP

    19602501.78526.385.542721.47-219.690-219.6913534542

    19612560.02544.76.691.15243288932807.16-247.140-247.1382503304

    19622715.2585.625.571.45072074932895.54-180.340-180.3430423313

    19632833.95617.755.641.11296613562986.71-152.760-152.7606740442

    19642998.6663.625.161.61542191263080.75-82.150-82.1487645798

    19653191.08719.124.511.94422438383177.7513.3313.33230821970

    19663399.08787.83.793.03239240063277.80121.28121.27932091970

    19673484.6832.583.843.16820889213381.00103.60103.59611489930

    19683652.7909.953.564.46871758333487.46165.24165.24350393460

    19693765.4984.63.495.11835856823597.26168.14168.13917887370

    19703771.851038.534.985.30605466643710.5261.3361.32760930930

    19713898.651127.15.955.16665515773827.3571.3071.29994215610

    19724104.91238.35.64.57573506543947.86157.04157.04389703480

    19734341.41382.724.865.90135636724072.16269.24269.24365836150

    19744319.51499.985.648.98483205524200.37119.13119.12976404030

    19754311.231638.328.489.41424698184332.62-21.390-21.3910093489

    19764540.921825.287.76.08397612334469.0471.8871.88423502240

    19774750.552030.937.056.65029916534609.75140.80140.80439207520

    19785015.022294.76.077.42050119694754.89260.13260.1342288210

    19795173.452563.35.858.54612376624904.60268.85268.85425439260

    19805161.682789.527.189.05285008815059.02102.66102.66058598250

    19815291.73128.427.629.63009624365218.3173.3973.39481056040

    19825189.253255.029.715.98282201015382.61-193.360-193.3561577627

    19835423.753536.689.64.13413837345552.08-128.330-128.3302248626

    19845813.63933.187.514.02324801985726.8986.7186.70973163920

    19856053.754220.257.193.16784320065907.20146.55146.5457058370

    19866263.624462.8272.28098696686093.20170.42170.42440207470

    19876475.054739.476.172.82347119616285.04190.01190.00706839490

    19886742.655103.755.493.55330486346482.93259.72259.71932474490

    19896981.45484.355.263.91636914166687.05294.35294.35098577310

    19907112.525803.085.623.93349430576897.59214.93214.92587804620

    19917100.525995.926.853.49177949827114.77-14.250-14.2483484882

    19927336.586337.757.492.37649813167338.78-2.200-2.2004149762

    19937532.656657.46.912.3710893947569.85-37.200-37.1956142543

    19947835.487072.226.12.21072911217808.1927.2927.29398223770

    19958031.77397.655.592.09727550598054.03-22.330-22.3306889712

    19968328.97816.835.411.96605664468307.6221.2821.2840964690

    19978703.58304.334.941.73895073888569.19134.31134.31462365060

    19989066.888746.974.51.15512936678838.99227.89227.88950417930

    19999470.359268.424.221.51156089099117.29353.06353.05943457020

    20009816.959816.973.972.2586408719404.35412.60412.59694703780

    20019890.6510127.954.742.41703753659700.45190.20190.19615243850

    200210048.8510469.65.781.773847710710005.8842.9742.97247512010

    200310301.110960.755.992.180963702210320.92-19.820-19.8176205776

    200410675.7211685.925.542.979362863810645.8829.8429.84308756720

    200510989.512421.885.073.358642483710981.078.438.43228866530

    200611294.8813178.354.623.310984590511326.81-31.930-31.932161438

    200711523.913807.554.632.746853182111683.44-159.540-159.5425497689

    200811651.9814264.65.812.198716245912051.30-399.320-399.3216255776

    Sheet1

    Sheet2

    Sheet3

  • What happens in the business cycleInflation generally decreased in a recession

  • Unemployment generally increased in a recession

  • 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 govt spending & tax cuts)Still running NOW!!See recovery.gov

  • Monetary Policy?See what the Fed did first

  • Feds policy response in business cycles since 2000

  • Monetary PolicyStarted 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 recessionInflation fallsUnemployment risesThe Fed can raise the money supply, soFed 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 spendingIn the long run, too much money leads to only inflation and too much deficit spending leads to a larger debt Just a myth? Lets see what happens if you try

  • A tale of Zimbabwe

  • Money is sometimes evil

  • Foreign SectorForeign exchange & trade (deficit), Ch. 33-34

    Look at this graph of the fluctuations in U.S. Real GDP between 1920 and 2007. The Great Depression should be easy to pick out, especially the initial drop between 1929 and 1933. You can also see the boom from 1941 to 1945 during World War II, the serious recessions in 1973-1975 and 1981-1982, the moderate recession in 1990-1991, and finally after a 10 year period, the longest period without a recession in U.S. history, before the mild recession in 2001.**ADD NOTES**