Transcript Chapter 5 - Denton ISD

Macro
McEachern
2011
ECON
5
2010-
CHAPTER Introduction to
Designed by
Amy McGuire, B-books, Ltd.
Chapter 5
Macroeconomi
cs
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The National Economy

Gross domestic product GDP

Market value

All final goods and services

Produced in U.S.

During a
given period
LO1
Chapter 5
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The National Economy

Flow variable

Amount per unit of time

Stock variable

Amount at a particular point in time
LO1
Chapter 5
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Economic Fluctuations
and Growth
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Rise and fall of economic activity
Business cycles
Expansions: Output increases
Contractions: Output decreases
Depression
Sharp reduction in output
Lasts > 1 year
High unemployment
Recession
Lasts > 6 months
LO2
Chapter 5
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Economic Fluctuations
and Growth
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Business cycle
Peak-to-trough-to-peak
Contraction
Between peak and trough
Expansion
Between trough and peak
Longest
10 years (March 1991 to March
2001)
LO2
Chapter 5
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Leading Economic
Indicators
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Leading economic indicators
Predict a change in economy
Recovery
Downturn
Coincident economic indicators
Reflect changes as they occur
Lagging economic indicators
Follow changes in economy
LO2
Chapter 5
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Aggregate Demand;
Aggregate Supply
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Aggregate output
Total amount of goods and services
Produced in economy
Given period
Real GDP
Aggregate demand
Price level
Quantity of aggregate
output demanded
LO3
Chapter 5
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Aggregate Demand Curve
Price level (2000 = 100)
Exhibit 4
LO3
150
100
50
AD
0
Chapter 5
The quantity of aggregate
output demanded is
inversely related to the
price level, other things
constant.
This inverse relationship is
reflected by the aggregate
demand curve AD.
Real GDP
2 4 6 8 10 12 14 16
(trillions of 2000 dollars)
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Exhibit 5
LO3 Aggregate Demand and Aggregate
Supply in 2008
Chapter 5
The total output of the
economy and its price
level are determined at
the intersection of the Ad
and AS curves.
This point reflects real
GDP and the price level
for 2008 using 2000 as
the base year.
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Equilibrium
AD curve intersects AS curve
Equilibrium price level
Equilibrium real GDP
Higher real GDP
More goods
and services
 Higher
employment
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LO3
Chapter 5
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Short History of the U.S.
Economy
1.
2.
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3.
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4.
Before and during Great Depression
After Great Depression to early 1970s
The Age of Keynes
From early 1970s to early 1980s
Stagflation
Since early 1980s
LO4
Chapter 5
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The Great Depression and Before
 1873 – 1879: Longest
contraction
 80 railroads – bankrupt
 1890s
 Contractions
 18% unemployment rate
 1929: The Great Depression
LO4
Chapter 5
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The Great Depression and Before
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1929 - 1933: Deepest economic contraction
Stock market crashed;
Investment dropped
Consumer spending fell;
Banks failed
Money supply dropped by 1/3
High tariffs – restricted trade
Big decline in AD
Real GDP dropped 27%
Price level dropped 26%
Unemployment rate 33%
LO4
Chapter 5
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LO4
Exhibit 6
The Decrease in Aggregate Demand
from 1929 to 1933
Price level (2000 = 100)
AS
12.0
8.9
AD1929
AD1933
0
Chapter 5
The Great Depression of the
1930s can be represented by
the shift to the left of the AD
curve, from AD1929 to AD1933.
In the resulting depression, real
GDP fell from $865 billion to
$636 billion, and the price level
dropped from 11.9 to 8.9,
measured relative to a price
level of 100 in the base year
2000.
Real GDP
636 865
(billions of 2000 dollars)
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The Age of Keynes
 After the Great Depression to early 1970s
 1936 John Maynard Keynes
 The General Theory of Employment, Interest,
and Money
 AD – inherently unstable
 Government - increase AD
 Expansionary fiscal policy
 Increase government spending
 Cut taxes
 Federal budget deficit
LO4
Chapter 5
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Stagflation: 1973 to 1980
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1970 Inflation rate: 5.3%
1971 Ceilings: prices, wages
1973 Crop failures
Soaring grain prices
OPEC cut oil supply
Increased oil prices
LO4
Chapter 5
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Exhibit 7
LO4
Stagflation from 1973 to 1975
Price level (2000 = 100)
AS1975
AS1973
38.0
31.9
AD
0
Chapter 5
The stagflation of the mid1970s can be represented as a
leftward shift of the AS curve
from AS1973 to AS1975.
Aggregate output fell from
$4.34 trillion in 1973 to $4.31
trillion in 1975, for a decline of
about $30 billion (stagnation).
The price level rose from 31.9
to 38.0, for a growth of 19%
(inflation).
Real GDP
4.31 4.34
(trillions of 2000 dollars)
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Since 1980
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Combat stagflation
Increase AS
Supply-side economics
Lower price level
Increase output
Increase employment
Through
lower taxes
LO4
Chapter 5
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Since 1980
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1981: Recession
Unemployment rate 10%
Lower output
Economic growth for 10 years
Federal budget deficit
1990: higher taxes
1993: higher taxes
1995: slower growth in federal spending
Lower federal deficits
LO4
Chapter 5
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Since 1980
LO4
Chapter 5
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1998: Federal budget surplus
Longest expansion: 1991-2001
22 millions new jobs
Unemployment rate 4.2%
Modest inflation
2001: Recession (8 months)
Slow recovery
2003, unemployment rate 6.3%
Tax cuts
Increased output
Federal budget deficit
December 2007: Recession
2.5 million jobs lost in 2008
2008 Federal deficit: $450 billion
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