1. Question: Based on the trend, what is the outlook for the 1990’s? Question: What does this suggest about the standard of living in the U.S.? Let us see what actually happened. U. S Productivity Growth: The Outlook for the 1990’s Late 1990s, Early 2000s, and Late 2000s

2. Question: How can we explain this? Technology? Natural Resources Physical Capital Human Capital Labor Reallocation

3. Late 1990s and Productivity UnempRealActual InflGovt YearRate (%)GDPRate (%)Purch 19955.6 10,165 2.1 2,260 19965.4 10,550 1.8 2,280 19974.9 11,025 1.7 2,320 19984.5 11,515 1.1 2,370 Review of the Aggregate Supply Curves The long run aggregate supply curve (LRAS) curve is a placeholder for potential GDP (GDP P ). Potential GDP (GDP P ) is what GDP equals whenever the actual inflation rate (  ) turns out to equal the expected inflation rate (  E ).  The aggregate supply (AS) curve intersects the long run aggregate supply (LRAS) curve at the expected inflation rate (  E ). Adaptive expectations: The expected inflation rate (  E ) depends on the actual inflation rate in the recent past. Revisit the Late 1990s G&S  (%) LRAS AS EE GDP P The aggregate supply curve (AS) curve upward sloping 3.8% 4.5% 4.4% Average growth rate in the eight decades = 3.3%

4. 1996 1995 G&S 10,000 1.50 1.25 1.00  (%) 10,500 2.00 1.75 11,00011,500 UnempRealActual InflExpected InflGovt YearRate (%)GDPRate (%)Rate (%)Pur AD 1995 AD 1998 AS 1998 AS 1995 LRAS 1995 19942.1 19955.6 10,1652.1 2,260 19965.4 10,5501.8 2,280 19974.9 11,0251.7 2,320 19984.5 11,5151.1 2,370  2.1  1.8  1.7 LRAS 1998 1997 1998 LRAS Curve shifts right LRAS curve had to shift right. AS and LRAS intersect at the expected inflation rate Expected Inflation Rate First focus on AD.  Expansionary fiscal policy  AD curve shifts right. Next focus on AS AS curve had to shift right Expected inflation rate fell Productivity growth caused potential GDP to increase

5. UnempRealActual InflExpected InflGovt Productivity YearRate (%)GDPRate (%) Purch Growth (%) 2000 2.3 20014.7 12,685 2.3 2,590 20025.8 12,910 1.5 2,705 4.5 20036.0 13,270 2.0 2,765 3.7 G&S 12,50012,750 2.0 1.5 1.0  (%) AD 2001 13,000 3.0 2.5 13,25013,500 Early Bush Years: 2001-2003 AD 2002 AD 2003 AS 2001 AS 2002 AS 2003  2.3  1.5 LRAS 2001 Potential GDP had to increase. LRAS is a placeholder for GDP P LRAS 2002 Question: How can we justify the increase in potential GDP? Question: What did potential GDP equal in 2001? 12,685 Potential GDP (GDP P ): GDP whenever actual inflation equals expected inflation. AS 2001,2002 2001 2002 2003 LRAS 2003 First focus on AS and LRAS in 2001 Next focus on AD  Expansionary fiscal policy  AD curve shifts right Return to AS and LRAS AS and LRAS intersect at the expected inflation rate

6. UnempRealActual InflExpected InflGovt YearRate (%)GDPRate (%) Purch 2006 3.1 20074.6 14,875 2.7 2,915 20085.8 14,835 2.0 2,995 20099.3 14,420 0.8 3,090 G&S 14,600 1.5 1.0  (%) AD 2007 2.5 2.0 14,80014,400  3.1  2.7  2.0 AD 2008 AD 2009 AS 2007 AS 2008 AS 2009 Late Bush Years: 2007-2009 15,000 3.0 2007 2008 2009 Puzzle First the AS curve Next the AD curve AD curve had to shift left

7. FP  (%) r (%) AD  (%) G&S AD Question: How many final goods and services would be purchased, if the inflation rate (  ) were _______ percent, given that all other factors relevant to demand remained the same? Preview: Business and Consumer Confidence FP Question: What would the real interest rate (r) equal, if the inflation rate (  ) were _______ percent, given that the Fed does not change its inflation policy? At a given inflation rate (  ) Consumer and/or business confidence decline Fewer goods and services purchased Aggregate demand (AD) curve shifts left  AD Households and/or firms purchase less   C and/or I down  AD = C + I + G down Claim: Changes in confidence shift the aggregate demand (AD) curve. Increases in confidence shift the aggregate demand (AD) curve right. Decreases in confidence shift the aggregate demand (AD) curve left.