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)
GDP Growth (%)
14.00
9.00
4.00
-1.00
1947
-6.00
1959
1971
1983
1995
2007
So, you see positive & negative gaps
500
400
300
200
100
0
-200
-300
-400
-500
08
20
05
20
02
20
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
19
75
19
72
19
69
19
66
19
63
19
60
19
-100
What happens in the business cycle
 Inflation generally decreased in a recession
Inflation (%)
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1947
-2.00
1959
1971
1983
1995
2007
Unemployment generally increased in a recession
Unemployment Rate (%)
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1947
1959
1971
1983
1995
2007
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
Federal Funds Rate (%)
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2000
2001
2003
2004
2006
2007
2009
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
Dollar Exchange Rate, Major Currencies (1973=100)
160
140
120
100
80
60
40
20
0
1973
1985
1997
2009