Summarizing Policy Impacts - Macro

Figure 11-5 Classical Theory and Increases in Aggregate Demand Classical theorists believed that Say’s law, flexible interest rates, prices, and wages would always lead to full employment at real GDP of $15 trillion

Equilibrium: SR and LR Supply

Early 1930s: large drop in real GDP The Great Depression Largest economic downturn in U.S. history From 1929 to 1933 Real GDP fell by 27% Unemployment rose from 3 to 25% Price level fell by 22% Cause: decrease in aggregate demand Decline in money supply (by 28%) Decreasing: consumer spending, investment spending

Figure 11-7 Demand-Determined Equilibrium Real GDP at Less Than Full Employment Keynes assumed prices will not fall when aggregate demand falls

Early 1940s: large increase in real GDP Economic boom World War II More resources to the military Government purchases increased Aggregate demand – increased 1939 - 1944 Doubled the economy’s production of goods and services 20% increase in the price level Unemployment fell from 17 to 1%

Figure 11-8 Real GDP and the Price Level, 1934–1940

The breakdown of the Phillips Curve: Multiplier < 1 7 The breakdown of the Phillips Curve: Multiplier < 1 This figure shows annual data from 1961 to 1973 on the unemployment rate and on the inflation rate (as measured by the GDP deflator). The Phillips curve of the 1960s breaks down in the early 1970s, just as Friedman and Phelps had predicted. Notice that the points labeled A, B, and C in this figure correspond roughly to the points in Figure 5.

Figure 11-10 Shifts in Both Short- and Long-Run Aggregate Supply

The breakdown of the Phillips Curve 7 The breakdown of the Phillips Curve This figure shows annual data from 1961 to 1973 on the unemployment rate and on the inflation rate (as measured by the GDP deflator). The Phillips curve of the 1960s breaks down in the early 1970s, just as Friedman and Phelps had predicted. Notice that the points labeled A, B, and C in this figure correspond roughly to the points in Figure 5.

Figure 11-9 Real GDP Determination with Fixed versus Flexible Prices

Figure 11-11 Shifts in SRAS Only

The supply shocks of the 1970s This figure shows annual data from 1972 to 1981 on the unemployment rate and on the inflation rate (as measured by the GDP deflator). In the periods 1973–1975 and 1978–1981, increases in world oil prices led to higher inflation and higher unemployment.

Figure 11-5 Classical Theory and Increases in Aggregate Demand Classical theorists believed that Say’s law, flexible interest rates, prices, and wages would always lead to full employment at real GDP of $15 trillion

The Volcker Disinflation 11 The Volcker Disinflation This figure shows annual data from 1979 to 1987 on the unemployment rate and on the inflation rate (as measured by the GDP deflator). The reduction in inflation during this period came at the cost of very high unemployment in 1982 and 1983. Note that the points labeled A, B, and C in this figure correspond roughly to the points in Figure 10.