Question: Based on the trend, what is the outlook for the 1990’s? Question: What does this suggest about the standard of living in the U.S.? Let us see what actually happened. U. S Productivity Growth: The Outlook for the 1990’s Late 1990s, Early 2000s, and Late 2000s

Question: How can we explain this? Technology? Natural Resources Physical Capital Human Capital Labor Reallocation

Late 1990s and Productivity UnempRealActual InflGovt YearRate (%)GDPRate (%)Purch , , , , , , , ,370 Review of the Aggregate Supply Curves The long run aggregate supply curve (LRAS) curve is a placeholder for potential GDP (GDP P ). Potential GDP (GDP P ) is what GDP equals whenever the actual inflation rate (  ) turns out to equal the expected inflation rate (  E ).  The aggregate supply (AS) curve intersects the long run aggregate supply (LRAS) curve at the expected inflation rate (  E ). Adaptive expectations: The expected inflation rate (  E ) depends on the actual inflation rate in the recent past. Revisit the Late 1990s G&S  (%) LRAS AS EE GDP P The aggregate supply curve (AS) curve upward sloping 3.8% 4.5% 4.4% Average growth rate in the eight decades = 3.3%

G&S 10,  (%) 10, ,00011,500 UnempRealActual InflExpected InflGovt YearRate (%)GDPRate (%)Rate (%)Pur AD 1995 AD 1998 AS 1998 AS 1995 LRAS , , , , , , , ,370  2.1  1.8  1.7 LRAS LRAS Curve shifts right LRAS curve had to shift right. AS and LRAS intersect at the expected inflation rate Expected Inflation Rate First focus on AD.  Expansionary fiscal policy  AD curve shifts right. Next focus on AS AS curve had to shift right Expected inflation rate fell Productivity growth caused potential GDP to increase

UnempRealActual InflExpected InflGovt Productivity YearRate (%)GDPRate (%) Purch Growth (%) , , , , , , G&S 12,50012,  (%) AD , ,25013,500 Early Bush Years: AD 2002 AD 2003 AS 2001 AS 2002 AS 2003  2.3  1.5 LRAS 2001 Potential GDP had to increase. LRAS is a placeholder for GDP P LRAS 2002 Question: How can we justify the increase in potential GDP? Question: What did potential GDP equal in 2001? 12,685 Potential GDP (GDP P ): GDP whenever actual inflation equals expected inflation. AS 2001, LRAS 2003 First focus on AS and LRAS in 2001 Next focus on AD  Expansionary fiscal policy  AD curve shifts right Return to AS and LRAS AS and LRAS intersect at the expected inflation rate

UnempRealActual InflExpected InflGovt YearRate (%)GDPRate (%) Purch , , , , , ,090 G&S 14,  (%) AD ,80014,400  3.1  2.7  2.0 AD 2008 AD 2009 AS 2007 AS 2008 AS 2009 Late Bush Years: , Puzzle First the AS curve Next the AD curve AD curve had to shift left

FP  (%) r (%) AD  (%) G&S AD Question: How many final goods and services would be purchased, if the inflation rate (  ) were _______ percent, given that all other factors relevant to demand remained the same? Preview: Business and Consumer Confidence FP Question: What would the real interest rate (r) equal, if the inflation rate (  ) were _______ percent, given that the Fed does not change its inflation policy? At a given inflation rate (  ) Consumer and/or business confidence decline Fewer goods and services purchased Aggregate demand (AD) curve shifts left  AD Households and/or firms purchase less   C and/or I down  AD = C + I + G down Claim: Changes in confidence shift the aggregate demand (AD) curve. Increases in confidence shift the aggregate demand (AD) curve right. Decreases in confidence shift the aggregate demand (AD) curve left.