Frank and Bernanke
Ch. 5: Macroeconomics: The Bird’sEye View of the Economy
Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html
Econ 202
2
The United States Business Cycle, 1890-1940
Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html
Econ 202
3
The United States Business Cycle, 1950-1990
Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html
Econ 202
4
Great Depression

Roaring twenties: by September 1929 stock
prices were 40% above their fundamental value.
 The Fed tried to cool off the market by raising
interest rates (providing less money in the
economy).
 The slow-down was viewed in terms of typical
market adjustments.
Econ 202
5
Great Depression

Governments tried to balance budgets,
further slowing down the economy.
 Huge deflation made bank collateral
worthless in defaults.
 Bank failures triggered bank panics.
 Financial system ground to a stop.
 Falling prices provided incentives to
postpone investment.
Econ 202
6
Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html
Econ 202
7
Great Depression

Gold standard restricted countries to expand
money supply only when they acquired gold as
a result of trade surpluses.
 Those countries that abandoned the gold
standard (Scandinavian countries, Japan)
slipped away from the Great Depression.
 To acquire gold, countries passed protectionist
policies (Smoot-Hawley in US).
Econ 202
8
Spiral of World Trade: Jan.
1929 to Mar. 1933
Dec
Jan
3000
2500
Feb
2000
Nov
Mar
1500
1000
500
0
Oct
Apr
Sep
May
Aug
Jun
Jul
Imports of 75 Countries. Source: E. Ray Canterbury, A Brief History of Economics,
(World Scientific, Singapore: 2001), p. 209.
Econ 202
9
Macroeconomics

The need to view the economy beyond the
supply and demand of individual markets
grew from the experience of the Great
Depression.
 John Maynard Keynes published his
General Theory in 1936.
Econ 202
10
Keynesian Macroeconomics

Keynes claimed that in the short run total
expenditures (aggregate demand) can fall
creating unemployment, recessions,
depressions.
 It is the responsibility of the government to
stimulate the economy in these cases
through monetary and fiscal policies.
Econ 202
11
Modern Macroeconomics

Keynesian macroeconomics only
concentrates on the short run.
 Living standards depend on long run
behavior of the economy.
 Living standards rise as a result of
productivity.
Econ 202
12
Real GDP (Chained 2000 Dollars)
12000
Billion $
10000
8000
6000
4000
2000
0
1925
1945
1965
1985
2005
Source: U.S. Department of Commerce, Bureau of Economic Analysis
http://research.stlouisfed.org/fred/data/gdp/gdpca
Econ 202
13
Population and Employment
300000
250000
(000)
200000
150000
100000
50000
0
1945
1955
1965
1975
Years
CE16OV
1985
1995
2005
POP
Source: http://www.stls.frb.org/fred/data/employ.html
Econ 202
14
Source: http://www.economist.com/displayStory.cfm?story_id=346598
Econ 202
15
http://www.dallasfed.org/research/swe/2005/swe0502.pdf
Econ 202
16
From about 1750, this iron law of history was broken. Growth
began to be no longer invisibly slow nor confined, as it largely
had been before, to farming. The new increase in human
productivity was staggeringly large: it not only supported a
hitherto unimaginable 7 1/2-fold rise in the world’s population,
but entirely transformed the lives of ordinary people throughout
the West.
Source: http://www.economist.com/displayStory.cfm?story_id=346598
Econ 202
17
Source: http://www.economist.com/displayStory.cfm?story_id=346605
Econ 202
18
Source: Bureau of Labor Statistics: http://www.bls.gov/cps/home.htm
Econ 202
19
Source: http://www.newyorkfed.org/research/directors_charts/i-bcd_15.pdf
Econ 202
20
Econ 202
21
US Trade

The goods and services deficit in 2004 was $617.7 billion, the highest
on record. As a percentage of U.S. gross domestic product, the goods
and services deficit increased from 4.5 percent in 2003 to 5.3 percent
in 2004.

Exports increased $125.6 billion in 2004 to $1,146.1 billion. Goods
were $807.6 billion and services were $338.6 billion.

Imports increased $246.9 billion in 2004 to $1,763.9 billion. Goods
were $1,473.8 billion and services were $290.1 billion.

For goods, the deficit was $666.2 billion in 2004, the highest on
record. For services, the surplus was $48.5 billion in 2004, down from
$51.0 billion in 2003.
Source: http://www.census.gov/indicator/www/ustrade.html
Econ 202
22
Econ 202
23
Types of Macroeconomic
Policies

Monetary
 Fiscal
 Structural
Econ 202
24
Types of Analysis

Positive
 Normative
Econ 202
25
Types of Data

Aggregate
 Detailed
Econ 202
26