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Review of U.S. Economy

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.?.

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Review of U.S. Economy

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  1. Review of U.S. Economy

  2. 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)

  3. 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

  4. US Real GDP, 1920-2010 TREND

  5. 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

  6. What if we take the trend outShort-Run Fluctuations (business cycle)

  7. So, you see positive & negative gaps

  8. What happens in the business cycle Inflation generally decreased in a recession

  9. Unemployment generally increased in a recession

  10. Policy Question • What should the government AUTHORITY do in a recession? • Federal government: Fiscal policy (Ch.13) • Central bank (Fed): Monetary policy (Ch.16)

  11. 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

  12. Monetary Policy?See what the Fed did first…

  13. Fed’s policy response in business cycles since 2000

  14. 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)

  15. 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

  16. 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…

  17. A tale of Zimbabwe

  18. Money is sometimes evil

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

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