Lectures in Macroeconomics- Charles W. Upton What Went Wrong.

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Presentation transcript:

Lectures in Macroeconomics- Charles W. Upton What Went Wrong

The Traditional Story The traditional story is that of a failure of markets.

What Went Wrong The Traditional Story The traditional story is that of a failure of markets. It is also the story of a perfect storm

What Went Wrong The Keynesian Version

What Went Wrong The Keynesian Version Markets cannot be relied on to get us to full employment. Government intervention is required.

What Went Wrong The Keynesian Version

What Went Wrong The Monetary History

What Went Wrong Friedman and Schwartz

What Went Wrong Phase I-The 1929 Recession Business Cycle reached peak in August 1929

What Went Wrong Phase I-The 1929 Recession Business Cycle reached peak in August 1929 Market “crashed” in October, –Decline comparable to October 1987 –Decline comparable to July 2002.

What Went Wrong Phase I-The 1929 Recession Business Cycle reached peak in August 1929 Market “crashed” in October, –Decline comparable to October 1987 –Decline comparable to July Signaled Recession

What Went Wrong The 1929 Crash Only part of the story

What Went Wrong Phase I-The 1929 Recession Y M PePe P YfYf PP M 1929

What Went Wrong If Nothing Else Had Happened Y M PePe P YfYf PP M 1929

What Went Wrong Phase II A Series of Monetary Shocks –Bank Failures US Foreign –Britain abandons Gold Standard in 1931 Hawley Smoot Tariff Tariff

What Went Wrong Phase II Y M PePe P YfYf PP M 1929 M 1931 M 1933

What Went Wrong Phase II Y M PePe P YfYf PP M 1929 M 1931 M 1933 There were also movements in Y and P curves, but to keep the graph simple….

What Went Wrong Components of GDP

What Went Wrong Components of GDP C ~Z Z ~C

What Went Wrong Components of GDP C ~Z Z ~C

What Went Wrong Two Unanswered Questions Why didn’t the economy bounce back sooner?

What Went Wrong Two Unanswered Questions Why didn’t the economy bounce back sooner? –People expected decline to be short-lived. –Thus only modest adjustment in wages and price expectations. –Multiple Shocks.

What Went Wrong Two Unanswered Questions Why didn’t the economy bounce back sooner? Why did the Federal Reserve System allow the money supply to fall?

What Went Wrong Two Unanswered Questions Why didn’t the economy bounce back sooner? Why did the Federal Reserve System allow the money supply to fall? Why Indeed?

What Went Wrong End ©2006 Charles W. Upton. All rights reserved