Transcript UT Stock Market & the Macroeconomy

The Stock Market and
the Macroeconomy
ECONOMICS: Principles and Applications 3e
HALL & LIEBERMAN
© 2005 Thomson Business and Professional Publishing
Table 1 The Performance of
Three Stock Market Indexes
Figure 1 The Market for Shares
of FedEx Corporation
Price per Share
S
$90
60
E
30
D
298 million
Number of Shares
Figure 2 Shifts in the Demand for
Shares Curve
Figure 3 The Two-Way Relationship Between
the Stock Market and the Economy
Stock Market
Macroeconomy
Figure 4 The Effect of Higher
Stock Prices on the Economy
(a)
Aggregate
Expenditure
Price
Level
(b)
AS
AEhigher stock
prices
AElower stock
prices
P2
P1
ADhigher stock
prices
ADlower stock
45°
prices
Y1
Y2
Real GDP
Y1 Y3 Y2
Real GDP
The Wealth Effect and
Equilibrium GDP
Stock
prices
Household
wealth
Autonomous
consumption
spending
Multiplier
effect
Both real
GDP and
price level
How the Economy Affects The
Stock Market: Expansion
Real
GDP
Current
profits
Expected
future
profits
Demand
curves for
stocks shift
rightward
Current
stock
prices
How the Economy Affects The Stock
Market: Recession
Real
GDP
Current
profits
Expected
future
profits
Demand
curves for
stocks shift
leftward
Current
stock
prices
Figure 5 Three Types of Shocks
Shock to
stock market
Shock to
macroeconomy
Stock Market
Macroeconomy
Shock to both
stock market and
macroeconomy
A Shock to the Economy
Government
purchases
Multiplier
effect
Real
GDP
A Shock to the Economy
Real
GDP
Corporate
profits
Stock
prices
A Shock to the Economy
Stock
prices
Autonomous
consumption
spending
Multiplier
effect
Real
GDP
Figure 6 The Fed’s Problem in
2000: An AS–AD View
If output exceeds potential, the
self-correcting mechanism will
raise the price level further
Price Wealth effect of rising
Level stock prices shifts AD
rightward, raising real
AS
GDP and the price level
Price
Level
AS1
P3
B
P2
P1
AS2
C
P2
A
AD2
B
AD1
Y1
(a)
Y2
Real GDP
AD2
A
P1
AD1
Y2 Real GDP
Y1
(b)
Figure 7 The Fed’s Problem In
2000: A Phillips Curve View
(a)
Inflation
Rate
2.5%
(b)
If the natural rate of
unemployment is 4%, the
Fed can keep the economy
at point A in the long run
Inflation
Rate
5.0%
A
2.5%
1.5%
C
A
But if the natural
rate is above 4%
the Phillips curve
will shift upward
and the Fed must
choose between
higher inflation . . .
D
B
PC1
4%
UN?
Unemployment
Rate
. . . or recession
PC1 PC
2
4% 5%
UN?
Unemployment
Rate