1. Summarizing Policy Impacts - Macro

2. 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

3. Equilibrium: SR and LR Supply

4. 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

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

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

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

8. The breakdown of the Phillips Curve: Multiplier < 17
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.

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

10. The breakdown of the Phillips Curve7
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.

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

12. Figure 11-11 Shifts in SRAS Only

13. 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.

14. 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

15. The Volcker Disinflation11
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 Note that the points labeled A, B, and C in this figure correspond roughly to the points in Figure 10.