1 Frank & Bernanke 3 rd edition, 2007 Ch. 4: Macroeconomics: The Bird’s-Eye View of the...

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Frank & BernankeFrank & Bernanke33rdrd edition, 2007 edition, 2007

Ch. 4: Macroeconomics: The Ch. 4: Macroeconomics: The Bird’s-Eye View of the EconomyBird’s-Eye View of the Economy

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The United States Business Cycle, 1890-1940The United States Business Cycle, 1890-1940

Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html

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The United States Business Cycle, 1950-1990The United States Business Cycle, 1950-1990

Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html

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Great DepressionGreat DepressionRoaring twenties: by September 1929 stock Roaring twenties: by September 1929 stock

prices were 40% above their fundamental prices were 40% above their fundamental value.value.

The Fed tried to cool off the market by The Fed tried to cool off the market by raising interest rates (providing less money raising interest rates (providing less money in the economy).in the economy).

The slow-down was viewed in terms of The slow-down was viewed in terms of typical market adjustments.typical market adjustments.

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Great DepressionGreat DepressionGovernments tried to balance budgets, Governments tried to balance budgets,

further slowing down the economy.further slowing down the economy.Huge deflation made bank collateral Huge deflation made bank collateral

worthless in defaults.worthless in defaults.Bank failures triggered bank panics.Bank failures triggered bank panics.Financial system ground to a stop.Financial system ground to a stop.Falling prices provided incentives to Falling prices provided incentives to

postpone investment.postpone investment.

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Source: http://econ161.berkeley.edu/TCEH/Slouch_Crash14.html

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Great DepressionGreat Depression Gold standard restricted countries to expand Gold standard restricted countries to expand

money supply only when they acquired gold money supply only when they acquired gold as a result of trade surpluses.as a result of trade surpluses.

Those countries that abandoned the gold Those countries that abandoned the gold standard (Scandinavian countries, Japan) standard (Scandinavian countries, Japan) slipped away from the Great Depression.slipped away from the Great Depression.

To acquire gold, countries passed To acquire gold, countries passed protectionist policies (Smoot-Hawley in US).protectionist policies (Smoot-Hawley in US).

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Spiral of World Trade: Jan. Spiral of World Trade: Jan. 1929 to Mar. 19331929 to Mar. 1933

0

500

1000

1500

2000

2500

3000Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Imports of 75 Countries. Source: E. Ray Canterbury, A Brief History of Economics,(World Scientific, Singapore: 2001), p. 209.

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MacroeconomicsMacroeconomics

The need to view the economy beyond the The need to view the economy beyond the supply and demand of individual markets supply and demand of individual markets grew from the experience of the Great grew from the experience of the Great Depression.Depression.

John Maynard Keynes published his John Maynard Keynes published his General Theory in 1936.General Theory in 1936.

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Keynesian MacroeconomicsKeynesian Macroeconomics

Keynes claimed that in the short run Keynes claimed that in the short run total expenditures (aggregate demand) total expenditures (aggregate demand) can fall creating unemployment, can fall creating unemployment, recessions, depressions.recessions, depressions.

It is the responsibility of the government It is the responsibility of the government to stimulate the economy in these cases to stimulate the economy in these cases through monetary and fiscal policies.through monetary and fiscal policies.

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Modern MacroeconomicsModern Macroeconomics

Keynesian macroeconomics only Keynesian macroeconomics only concentrates on the short run.concentrates on the short run.

Living standards depend on long run Living standards depend on long run behavior of the economy.behavior of the economy.

Living standards rise as a result of Living standards rise as a result of productivity.productivity.

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Source: U.S. Department of Commerce, Bureau of Economic Analysishttp://research.stlouisfed.org/fred/data/gdp/gdpca

Real GDP (Chained 2000 Dollars)

0

2000

4000

6000

8000

10000

12000

1925 1945 1965 1985 2005

Bill

ion

$

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Population and Employment

0

50000

100000

150000

200000

250000

300000

1945 1955 1965 1975 1985 1995 2005

Years

(00

0)

CE16OV POP

Source: http://www.stls.frb.org/fred/data/employ.html

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Source: http://www.economist.com/displayStory.cfm?story_id=346598

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http://www.dallasfed.org/research/swe/2005/swe0502.pdf

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Source: http://www.economist.com/displayStory.cfm?story_id=346598

From about 1750, this iron law of history was broken. Growth began to be no longer invisibly slow nor confined, as it largely had been before, to farming. The new increase in human productivity was staggeringly large: it not only supported a hitherto unimaginable 7 1/2-fold rise in the world’s population, but entirely transformed the lives of ordinary people throughout the West.

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Source: http://www.economist.com/displayStory.cfm?story_id=346605

1919

Source: Bureau of Labor Statistics: http://www.bls.gov/cps/home.htm

2020

Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

2121http://www.census.gov/indicator/www/ustrade.html

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http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

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Types of Macroeconomic Types of Macroeconomic PoliciesPolicies

MonetaryMonetaryFiscalFiscalStructuralStructural

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Types of AnalysisTypes of Analysis

PositivePositiveNormativeNormative

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Types of DataTypes of Data

AggregateAggregateDetailedDetailed