1. The Short-Run Macro Model
CHAPTER
The Short-Run Macro Model
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. Short-Run Macro Model Short-run macro model In the short run:
Macroeconomic model that explains how changes in spending can affect real GDP in the short run
In the short run:
Spending depends on income
Income depends on spending
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Consumption Spending Consumption spending increases when:
Disposable income rises
Wealth rises
The interest rate falls
Households become more optimistic about the future
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Consumption Spending Disposable income
= Income − Tax payments + Transfers received
= Income − (Taxes − Transfers)
= Income − Net taxes
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Consumption and Disposable Income
Relationship between consumption spending and disposable income
As disposable income rises, consumption spending rises
Is roughly linear
The consumption function
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. 1 Quarterly U.S. Consumption and Disposable Income, 2000–2011
When real consumption expenditure is plotted against real disposable income, the resulting relationship is very close to linear: As real disposable income rises, so does real consumption spending.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Consumption and Disposable Income
Consumption function
Positively sloped relationship between real consumption spending and real disposable income
Autonomous consumption spending
The part of consumption spending that is independent of income
Vertical intercept of the consumption function
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. 1 Hypothetical Data on Disposable Income and Consumption
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Consumption and Disposable Income
Marginal propensity to consume (MPC) is
The slope of the consumption function
The change in consumption divided by the change in disposable income
The amount by which consumption spending rises when disposable income rises by one dollar
0 < MPC < 1
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Real Disposable Income ($ billions)2
The Consumption Function
Consumption
Function
Real Disposable Income ($ billions)
Real Consumption Spending ($ billions)
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
The consumption function shows the (linear) relationship between real consumption spending and real disposable income.
Consumption
Function
The vertical intercept ($2,000 billion) is autonomous consumption spending . . .
600
1,000
and the slope of the line (0.6) is the marginal propensity to consume.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Consumption and Disposable Income
Straight line consumption function
C = a + b ˣ (Disposable income)
C: consumption spending
a: vertical intercept of the consumption function
The theoretical level of consumption spending at disposable income = 0
Autonomous consumption spending
b: slope of the consumption function
MPC
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Consumption and Income
Limitation of the consumption function
It shows us the value of consumption at each level of disposable income
We need to know the value of consumption spending at each level of income
Assumption
Net taxes are independent of income
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. 2 The Relationship between Consumption and Income
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Consumption and Income
Consumption–income line
A line showing aggregate consumption spending at each level of income or GDP
Same slope as the consumption function
MPC
Vertical intercept = a − MPC × T
Because of taxes
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. 3 The Consumption–Income Line Real Income ($ billions) Consumption
Function
Real Consumption Spending ($ billions)
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
5,600
Consumption–Income Line B A
2. The line has the same slope as the consumption function in Figure
600
1,000
3. but a different vertical intercept.
800
1. To draw the consumption–income line, we measure real income (instead of real disposable income) on the horizontal axis.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Consumption and Income
If income increases and net taxes remain unchanged
Disposable income will rise
Consumption spending will rise
Movement rightward along the consumption– income line
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Consumption and Income
A decrease in net taxes
Disposable income will rise at each level of income
Consumption spending will rise at any income level
Shift upward of the consumption–income line
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Consumption and Income
Increase in autonomous consumption
Because of
An increase in household wealth
Interest rates decrease
Household became more optimistic about the future
Shift the consumption–income line upward
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Real income ($ billions)4
A Shift in the Consumption–Income Line
Real income ($ billions)
Consumption
Function
Real Consumption Spending ($ Billions)
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Consumption–income line when net taxes drop to $500 billion
Consumption–income line when net taxes start at $2,000 billion
1,700
800
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Consumption and Income
Move along the consumption–income line
When a change in income causes consumption spending to change
Shift of the consumption–income line
When a change in anything else besides income causes consumption spending to change
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. 3 Shifts in the Consumption–Income Line
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Total Spending Components of total spending Assumptions: Ip, G, and NX
Consumption spending by households (C)
Planned investment spending (Ip)
Government purchases (G)
Net exports (NX)
Assumptions: Ip, G, and NX
Are determined outside of our analysis
Have fixed values
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. Total Spending Investment spending (Ip) Government purchases
Plant and equipment purchases by business firms and new home construction
Not included: changes in inventories
Government purchases
All of the goods and services that government agencies - federal, state, and local - buy during the year
Net exports (NX)
Exports minus imports
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Aggregate Expenditure
Aggregate expenditure (AE)
Sum of spending by households, business firms, the government, and foreigners
On final goods and services produced in the United States
= C + IP + G + NX
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. 4 The relationship between income and aggregate expenditure
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Income and Aggregate Expenditure
Relationship between income and spending
Is circular: spending depends on income, and income depends on spending
Aggregate expenditure increases as income rises
When income increases (by ΔGDP)
AE increases by ΔAE = MPC ˣ ΔGDP
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Equilibrium GDP When AE < GDP When AE > GDP
Output will decline in the future
Thus, any level of output at which AE < GDP cannot be the equilibrium GDP
When AE > GDP
Output will rise in the future
Thus, any level of output at which AE > GDP cannot be the equilibrium GDP
Equilibrium GDP in the short run
The level of output at which AE = GDP
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Inventories and Equilibrium GDP
Change in inventories during any period
Will always equal output minus aggregate expenditure
Δ Inventories = GDP – AE
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. Equilibrium GDP AE line A 45° line = translator line
C, consumption-income line
C+IP at each level of income
C+IP+G at each level of income
AE line: C+IP+G+NX at each level of income
Slope = MPC
A 45° line = translator line
It allows us to measure any horizontal distance as a vertical distance instead
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. 5 Deriving the Aggregate Expenditure Line Real GDP ($ billions)
Consumption
Function
Real Aggregate Expenditure ($ billions)
2,000
4,000
6,000
8,000
10,000
12,000
C + IP + G + NX
C + IP + G
5. to get the aggregate expenditure line.
C + IP C
4. and net exports (NX) . . .
3. government purchases (G) . . .
2. then add planned investment (Ip) . . .
1. Start with the consumption–income line,
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. 6 Using a 45° Line to Translate Distances A 1. Using a 45° line . . .
Dollars
Consumption
Function A
1. Using a 45° line . . . B
3. into an equal vertical
distance (BA).
45°
2. we can translate any horizontal
distance (such as 0B) . . .
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. Equilibrium GDP Any output level where AE line lies below the 45° line
AE < GDP
Inventories will grow
Reduce output in the future
AE line lies above the 45° line
AE > GDP
Inventories will decline
Increase their output in the future
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. 7 Determining Equilibrium Real GDP Real GDP ($ billions) Consumption
Function
Real AE ($ billions)
2,000
4,000
6,000
8,000
10,000
12,000
Increase in inventories
At point E, where the aggregate expenditure line crosses the 45° line, the economy is in short-run equilibrium. With real GDP equal to $8,000 billion, aggregate expenditure equals real GDP. At higher levels of real GDP—such as $12,000 billion—total production exceeds aggregate expenditures, and firms will be unable to sell all they produce. Unplanned inventory increases equal to HA will lead them to reduce production. At lower levels of real GDP—such as $4,000 billion—aggregate expenditure exceeds total production. Firms find their inventories falling, and they will respond by increasing production. A
C+IP+G+NX
Total
Output
Decrease in inventories H
Aggregate
Expenditure E K
Aggregate
Expenditure
Total
Output J
45°
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

34. Equilibrium GDP Equilibrium GDP
Is the output level at which the AE line intersects the 45° line
If firms produce this output level
Their inventories will not change
And they will be content to continue producing the same level of output in the future
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

35. Equilibrium GDP and Employment
Short-run equilibrium and yet have abnormally high unemployment
Aggregate expenditure line is too low to create an intersection at full-employment output
Cyclical unemployment is caused by insufficient spending
As long as spending remains low
Production will remain low
Unemployment will remain high
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

36. 8 Equilibrium GDP Can Be Less than Full-Employment GDP Real GDP
($ billions)
Consumption
Function
Aggregate Expenditure ($ billions)
Number
of workers
Consumption
Function
Real GDP ($ billions)
When the aggregate expenditure line is low . . .
Aggregate Production Function
cyclical unemployment = 50 million
AELOW F
$10,000
$10,000
$10,000
150
Million B E A
$8,000
$8,000
100
Million
Equilibrium output ($8,000) is less than potential output,
and equilibrium employment is less than full employment
45°
Potential GDP
Full employment
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

37. Equilibrium GDP and Employment
Short-run equilibrium
Economy can overheat because spending is too high
As long as spending remains high
Production will exceed potential output
Unemployment will be unusually low
Abnormally high employment
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

38. 10 Equilibrium GDP can be greater than full-employment GDP
Real GDP ($ billions)
Consumption
Function
Aggregate Expenditure
($ billions)
Number of workers
Consumption
Function
Real GDP
($ billions)
When the aggregate expenditure line is high . . .
and equilibrium employment is greater than full employment
Aggregate
Production
Function
AEHIGH E’
$12,000 F
$12,000
200
Million H
$10,000
$10,000 B
$10,000
150
Million
Equilibrium output ($12,000) is greater than potential output,
45°
Potential GDP
Full employment
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

39. What Happens When Things Change?
Increases in investment by $x
$x additional sales revenue
$x additional income
$x additional disposable income
MPC ˣ $x additional consumption spending
MPC ˣ $x additional sales revenue …
Equilibrium GDP rises by a multiple of $x
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

40. 5
Increases in Spending after Investment Spending Rises by $1,000 Billion per Year
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

41. The Effect of a Change in Investment Spending
An increase in investment spending sets off a chain reaction, leading to successive rounds of increased spending and income. As shown here, a $1,000 billion increase in investment spending first causes real GDP to increase by $1,000 billion. Then, with higher incomes, households increase consumption spending by the MPC times the change in disposable income. In round 2, spending and GDP increase by another $600 billion. In succeeding rounds, increases in income lead to further changes in spending, but in each round the increases in income and spending are smaller than in the preceding round.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

42. What Happens When Things Change?
ΔGDP = Expenditure multiplier ˣ ΔIP
Expenditure multiplier = 1 / (1-MPC)
The amount by which equilibrium real GDP changes
As a result of a one-dollar change in:
Autonomous consumption,
Investment spending,
Government purchases,
Or net exports
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

43. What Happens When Things Change?
Increase in investment
Equilibrium GDP rises by a multiple of the change in spending
Decrease in investment spending
Equilibrium GDP falls by a multiple of the change in spending
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

44. What Happens When Things Change?
Changes in Ip, G, NX, or a
Lead to a multiplier effect on GDP
∆GDP = The expenditure multiplier × The initial change in spending
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

45. 11 A Graphical View of the Multiplier Real GDP ($ billions)
Consumption
Function
Real AE
2,000
4,000
6,000
8,000
10,000
12,000
The economy starts off at point E with equilibrium real GDP of $8,000 billion. A $1,000 billion increase in spending shifts the aggregate expenditure line upward by $1,000 billion, triggering the multiplier process. Eventually, the economy will reach a new equilibrium at point F, where the new, higher aggregate expenditure line crosses the 45° line. At F, real GDP is $10,500 billion, an increase of $2,500 billion.
AE2
45°
AE1 F E
Increase in
Equilibrium GDP
= $ 2,500 Billion
$1,000
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

46. What Happens When Things Change?
An increase in Ip, G, NX, or a
Will shift the aggregate expenditure line upward
By the initial increase in spending
Equilibrium GDP will rise
By the initial increase in spending times the expenditure multiplier
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

47. Multiplier Process and Economic Stability
All else equal, the larger the multiplier
The more unstable the economy
Automatic stabilizer
Feature of the economy that
Reduces the size of the expenditure multiplier and diminishes the impact of spending changes on real GDP
Reduce fluctuations in GDP and employment
Economy: more stable in the short run
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

48. Multiplier Process and Economic Stability
Taxes and transfers depend on income
Increase in income
Higher taxes and lower transfers
Less additional spending in each round
Smaller multiplier
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

49. Multiplier Process and Economic Stability
Imports depend on income
Increase in income
Increase spending on imports
Smaller spending on domestic output each round
The MPC and the multiplier
Will be smaller when income changes are regarded as temporary
Will be larger when income changes are regarded as permanent
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

50. Multiplier Process and Economic Stability
Automatic de-stabilizers
Feature of the economy that
Increases the size of the expenditure multiplier
And enlarges the impact of spending changes on real GDP
Enlarge fluctuations in GDP and employment
Economy: less stable in the short run
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

51. Multiplier Process and Economic Stability
Household wealth changes with income
Rising income
Rising wealth
Rising consumption spending
Larger multiplier effect on GDP
Investment spending
Changes during the multiplier process
GDP rises
Increase investment
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

52. Multiplier Process and Economic Stability
In the long run
Given the growth of potential GDP
The value of the expenditure multiplier is zero
No matter what the change in spending
Economy will ultimately return to its potential GDP, just as it would have without the spending change
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

53. 2008 to 2011: The Recession and the Long Slump
Causes for the recession in the U.S.
2007, spike in oil prices
2007, collapse of the housing bubble
2008, financial crisis
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

54. 2007, collapse of the housing bubble
2008 to 2011: The Recession...
2007, spike in oil prices
Decrease spending in automobiles
Laid-off workers
2007, collapse of the housing bubble
Rapid fall in home prices: decline in wealth
Decline in autonomous consumption spending
AE line shifted downward
Investment spending fell
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

55. 2008 to 2011: The Recession... 3. 2008, financial crisis
Defaults on mortgage payments
Decrease in lending throughout the economy
Fear and gloom about the economy’s future
Households: cut back dramatically on spending
Corporate profits: falling
Share prices: began to plummet
Major hit to household wealth
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

56. Automatic de-stabilizers:
2008 to 2011: The Recession...
Automatic de-stabilizers:
Falling output caused falling asset prices
Homes and stocks
Falling asset prices led to further decreases in spending and output
By the end of the process
Wealth of U.S. households declined by $14 trillion in a little over a year
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

57. 12 Consumption and Investment: 2006–2009 (a)
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

58. 12 Consumption and Investment: 2006–2009 (b)
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

59. Automatic stabilizers:
2008 to 2011: The Recession...
Automatic stabilizers:
Government’s tax revenues fell and transfer payments rose
Helping to cushion the decline in disposable income and maintain spending
Imports declined
Shifting some of the impact of lower spending to firms in other countries
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

60. 13
The Recession of 2008–2009 (a, b)
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

61. 13
The Recession of 2008–2009 (c)
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

62. Recession in other countries
2008 to 2011: The Recession...
Recession in other countries
Global recession, closely synchronized
Other countries: housing boom and bust
At the same time
Lengthy period of low interest rates around the globe
Leverage and speculation
The financial crisis
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

63. Recession in other countries
2008 to 2011: The Recession...
Recession in other countries
Germany and Japan did not have housing bubbles
Very strong growth in exports
Especially severe downturns
Because of net exports
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

64. 14 The Recession in Other Countries
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

65. Potential GDP rises each year
2008 to 2011: The Recession...
The long slump
All the economies in Figure 14: still mired in deep slumps well into 2011
Potential GDP rises each year
Because of growth in both the labor force and labor productivity
Returning to 2007 levels of real GDP by 2010
Would not end the slump: by 2010, potential GDP was higher than in 2007
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

66. 15
The Long Slump
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

67. Remain in a slump for many quarters
2008 to 2011: The Recession...
In 2007, the U.S. economy
Was operating at potential output: about $13,050 billion
In 2010
We returned to the 2007 output level
Potential GDP: $14,000 billion
Remain in a slump for many quarters
Even when GDP starts to rise, it has a lot of catching up to do
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

68. A quick end to the slump from the private sector was unlikely
2008 to 2011: The Recession...
A quick end to the slump from the private sector was unlikely
Investment in new home construction: dropped
Business investment in new capital equipment: stagnating
Consumption spending
Unemployed and employed: cut back on spending
Exports: increased modestly
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

69. Possible government policy solutions
2008 to 2011: The Recession...
Possible government policy solutions
Increase government purchases
Change net taxes (T )
Altering tax and transfer policies
In order to stimulate consumption spending
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.