Transcript Unit 9 - WusslersClassroom

Diana and Alyssa

Can’t save your way
out of a recession


Key to fix recession=
increase spending


Balanced budget will
only make a recession
worse
Increase G, decrease T,
increase TP
Since spending
increased, national
debt increases as well

Thus increasing public
debt
 Crowding
In: increase in G leads to an
increase in I. if the gov’t starts to stimulate
the economy businesses will want to take
advantage of the increase in AD and they will
start to produce more (Horizontal range)
 Crowding Out: increase in G
increase in
AD
increase in RGDP & PL
increase in
Demand for money
increase in MS &
interest rates
decrease in I
decrease in
AD (vertical range)
 Definition:
Fed
buying bond the
gov’t is selling it
creates money
from gov’t debt

Problem = two
expansionary
policies will possibly
cause more inflation
 Definition:
the deficit that would occur if we
were at full employment

Tax revenue is as high as expected and spending
doesn’t have to increase


As long as we maintain full employment, the
budget will be “balanced”



Taxes = spending at full employment
This is acceptable
We would only get a deficit b/c of a war or a recession
Problem: we have had deficits even during peace
time with full employment

We need to expect deficits even at full employment
 #1
– Repaying the enormous debt will ruin
the nation


We don’t have to worry about paying the debt
b/c the gov’t will never die
Gov’t can just roll over the debt or print extra
money (will cause hyper inflation)
 The
gov’t has limited borrowing capacity and
possesses the danger of bankruptcy


Gov’t sets their own limits for borrowing
Worse case scenario: just print more money
 Future
generations will be burdened by
heavy interest payments and high taxes will
be needed to make payments


Originally, bonds were mostly owned by
Americans so when the bonds matured and the
bonds had to be paid back to Americans so the
money stayed within our economy
Now, however, 40-45% of US bonds are owned by
foreigners so essentially the money is leaving our
economy and creating a burden of high interest
payments for our citizens
 U.E.
rate vs. PL (inflation rate)
 Short-run P.C.



Inverse relationship (downward sloping)
Low levels of UE it is stimulated by AD, but when
we have high levels of UE it is restricted by AD
Trade-off: in order for UE to be low, inflation must
be high (vice versa)
 Long-run



Vertical Line
Found at the natural rate of UE (PGDP – SCM)
The faster Demand grows the higher inflation will
be (and vice versa) with no effect on UE
 Believe
that you can forecast inflation with
the best available data


Not necessarily correct, often random
If it was true, the short-run P.C. would be
vertical

Inflation would be able to reduce without a period of
high UE
 Believe

that inflation is more costly than UE
“It depends”
 Short-run
P.C. is steep, expectations react
quickly, and the Self-correcting Mechanism
works smoothly and rapidly

All above are false
 Recessionary

To close we would decrease inflation, but that
would move us away from the natural rate of UE
and increase UE rates
 Inflationary

Gap
Gap
To close we would increase inflation, but that
would move us UE rates down, but possibly past
the natural rate of UE making inflation very high
 Main
issue: moving away from the natural
rate of UE