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, 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 ( ) 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)

So, you see positive & negative gaps

What happens in the business cycle Inflation generally decreased in a recession

Unemployment generally increased in a recession

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 and June 2009 Output declined substantially after the collapse of Lehman Brothers in Oct 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

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