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Macroeconomics Depression Model. Why do depressions happen? Any economy based on money can collapse spontaneously All it takes is for people to reduce.

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Presentation on theme: "Macroeconomics Depression Model. Why do depressions happen? Any economy based on money can collapse spontaneously All it takes is for people to reduce."— Presentation transcript:

1 Macroeconomics Depression Model

2 Why do depressions happen? Any economy based on money can collapse spontaneously All it takes is for people to reduce spending

3 What solves depressions? Somebody spends money

4 Money Money has two roles – Medium of exchange – Store of value – The basic problem that leads to depressions: You can store money But you can’t store labor

5 Depressions modeled DC babysitting coop

6 DC babysitting coop (late 1970s) Over 100 families babysitting for each other Certificates or coupons exchanged for babysitting Committee gave out coupons to new members, collected coupons from departing members Limited the number of times you got a babysitter minus the number of times you babysat.

7 Problem arose when … Some families saved coupons for future needs. Made it harder for other families to earn coupons. Led to more families saving coupons for future needs. Led to lots of families wanting to babysit, way more than the number of families willing to hire a babysitter. That’s a depression!

8 Vicious circle or downward spiral People save coupons for future use. Fewer people are hiring. People who want coupons lack opportunities to earn them. People worry that they won’t have coupons when they need them.

9 Depression economics – common sense, upside-down Thrift a virtue? – Paradox of thrift Better skills needed? – Babysitter training program?

10 Depression economics – common sense upside-down Normal times Saving helps society – provides funds for investment Education makes you more productive, which makes society more productive Depression times Saving, which means not spending, reduces opportunities for investment. Education gets you out of the labor force, and provides an excuse for the government to give away money

11 What they tried … Lawyers: Committee should make a rule that each family must get a babysitter once a week. – Forced spending – unpopular, hard to enforce Economist: Committee should give out more coupons to everybody – Once families had enough coupons to satisfy their expected future needs, they started spending.

12 What solved the depression Giving out certificates – Solved the baby sitting coop depression Giving out money -- through government spending – Solved the Great Depression of the 1930s

13 Too many certificates? Equity in babysitting requires members not be flooded with certificates – How many times you can go out = How many times you’ve babysat + how many certificates the committee gave you If everyone has all the certificates they expect to need, the certificates are worthless – Functional equivalent of inflation

14 The problem of giving out money Money tied to morality People who work hard for their money resent giveaways So we look for excuses to give out money – “deserving” people – Government contracts and hiring to do something useful

15 Babysitting coop as a model economy with special limitations One commodity, plus money – (Common in macroeconomic models) – The special limitations: Fixed price – fixed value of a certificate No borrowing or lending – These limitations are two sides of the same coin

16 Real economies have lending and borrowing Credit older than coins Most transactions on credit – Even when prices reckoned in weights of gold or silver Lending and borrowing could create babysitting certificates – And later destroy them

17 Money and banking The U.S. does have lending and borrowing – which can expand or contract the money stock. Our committee in charge of money is the Federal Reserve System – which can manipulate the financial system to affect how much money people and institutions are borrowing and lending, which affects how much is being spent in any period of time.


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