Transcript US RECESSION

A Presentation by
Gholam Syedain Khan
nd
(2
M.Com
Sem.)
Roll No. 36
St. Xavier’s College, Calcutta
WHAT IS RECESSION???
 The standard way of defining a
recession looks at the value of
economic output adjusted for
inflation. This measure is known
as Real Gross Domestic Product
(GDP).
 Two consecutive quarters of
decline in Real GDP is generally
considered to be a recession.
THE US RECESSION 2001


The Us economy shrank in three
quarters in the early 2000s (the
3rd quarter of 2000), the first
quarter of 2001, and the third
quarter of 2001.
The US economy was in recession
from March 2001 to November
2001, a period of eight months.
US RECESSION - 2001
 U.S. had a recession in the first three quarters of
2001.
US RECESSION - 2001


The 2001 recession saw a
0.6 percent decline from the
peak in the fourth quarter of
2000.
The U.S. economy took a
year to exceed its prior peak
in the 1990-91 business
cycle.
What Happened During 2001…
•2.1 million people lost their
jobs,
as unemployment rose from
3.9% to 5.8%.
•GDP growth slowed to 0.8%
(compared to 3.9% average
annual growth during 19942000).
Causes of the U.S. recession of 2001
Index (1942 = 100)
 1) Stock market decline  C
1500
1200
Standard & Poor’s
500
900
600
300
1995
1996
1997
1998
1999
2000
2001
2002
2003
Causes of the U.S. recession
 2) 9/11 Terrorist Attack on US
– increased uncertainty
– fall in consumer & business
confidence
– result: lower spending, IS curve
shifted left
– reduced stock prices, discouraged
investment
Response of Fiscal Policy in
The U.S. recession
 Fiscal policy response: shifted
IS curve right
 tax cuts in 2001 and 2003
 spending increases
 airline industry bailout
 Afghanistan war
Respone of Monetary Policy in
The U.S. recession of 2001
Monetary policy response: shifted LM
curve downward (right)
7
6
5
4
3
2
1
0
Three-month
T-Bill Rate
The U.S. Growth Rate,
1999:1-2002:4
The Federal Funds Rate, 1999:12002:4
US RECESSION 2001
IN
IS-LM MODEL
WHAT IS SHOCKS IN THE IS
CURVE?
• Shocks to the IS curve are exogenous
changes in the demand for goods and
services.
• Reduction in the demand for investment
• This leads to the shift of IS curve left,
reducing income and expenditure.
• Sudden increase in consumption shifts
the IS curve right,  C and this raises
income.
WHAT IS LM SHOCKS?
exogenous changes in the demand for money.
Examples:
more ATMs or the Internet reduce money
demand.
 Thus increase in Money demand shifts the
LM curve upward
  Rise in Interest rate & depress income.
Summary of IS-LM model
Several kinds of events can cause
economic fluctuations by shifting the IS
curve or the LM curve.
The U.S. Recession in IS-LM MODEL
• What happened in 2001
was the following:
 The decrease in investment
demand led to a sharp shift
of the IS curve to the left,
from IS to IS”.
 The increase in the money
supply led to a downward
shift of the LM curve, from
LM to LM’.
 The decrease in tax rates
and the increase in
spending both led to a shift
of the IS curve to the right,
from IS’’ to IS’.
How does the IS-LM Model Fit the Facts?
Introducing dynamics formally would be difficult,
but we can describe the basic mechanisms in
words.

 Consumers are likely to take some time to
adjust their consumption following a change
in disposable income.
 Firms are likely to take some time to adjust
investment spending following a change in
their sales.
 Firms are likely to take some time to adjust
investment spending following a change in
the interest rate.
 Firms are likely to take some time to adjust
production following a change in their sales.
How does the IS-LM Model Fit the Facts?
The Empirical Effects of an
Increase in the Federal Funds
Rate
In the short run, an increase in
the federal funds rate leads to a
decrease in output and to an
increase in unemployment, but has
little effect on the price level.
Panel (a) shows the effects
of an increase in the federal
funds rate of 1% on retail
sales over time.
Panel (b) shows how lower
sales lead to lower output.
Panel (c) shows how lower
output leads to lower
employment.
Panel (d) shows the increase
in unemloyment
Panel (e) looks at the
behavior of the price level.