1. © RAINER MAURER, Pforzheim - 1 - Prof. Dr. Rainer Maurer Macroeconomics Case Study: Economic Policy in the Current Recession

2. © RAINER MAURER, Pforzheim - 2 - Prof. Dr. Rainer MaurerMacroeconomics 3. The Keynesian Model and its Policy Implications 3.1. The Keynesian Theory 3.1.1. The "Keynesian Cross" 3.1.2. The Keynesian Model with Capital Market 3.2. Short-run Business Cycle Fluctuations 3.2.2. Reduction of the Propensity to Invest 3.2.1. Reduction of the Propensity to Consume 3.3. Fiscal and Monetary Policy in the Keynesian Model 3.3.1. Fiscal Policy 3.3.2. Monetary Policy 3.4. The Long-run Implications of the Keynesian Model 3.5. Policy Conclusions 3.5.1. Practical Problems of Anti-cyclical Policy 3.5.2. Case Study: Fiscal Policy in Germany 3.5.3. Case Study: Economic Policy in the Current Recession

3. © RAINER MAURER, Pforzheim - 3 - Prof. Dr. Rainer Maurer 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

4. © RAINER MAURER, Pforzheim - 4 - Prof. Dr. Rainer Maurer 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

5. © RAINER MAURER, Pforzheim - 5 - Prof. Dr. Rainer Maurer Private Consumption in Current Prices, Billion Euro Quelle: Statistisches Bundesamt 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

6. © RAINER MAURER, Pforzheim - 6 - Prof. Dr. Rainer Maurer Gross Investment in Current Prices, Billion Euro Quelle: Statistisches Bundesamt 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

7. © RAINER MAURER, Pforzheim - 7 - Prof. Dr. Rainer Maurer ➤ The expenditure account of GDP show the components of the demand for domestic goods: Y = C + I + G + EX – IM BIP = Consumption + Gross Investment + Government Consumption + Exports - Imports “Net Exports” 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

8. © RAINER MAURER, Pforzheim - 8 - Prof. Dr. Rainer Maurer Exports./. Imports in Current Prices, Billion Euro Quelle: Statistisches Bundesamt 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

9. © RAINER MAURER, Pforzheim - 9 - Prof. Dr. Rainer Maurer Production in Manufacturing, 2005 = 100 Quelle: Statistisches Bundesamt As postulated by the Keynesian model firms adjust their production in the short-run to the demand for goods. 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

10. © RAINER MAURER, Pforzheim - 10 - Prof. Dr. Rainer Maurer ➤ As the data reveal, the current recession was mainly caused by a reduction of investment and export demand. ➤ The reason for the reduction of investment and export demand was the bursting of a speculative bubble on the US real estate market. ➤ The causal chain behind the development is relatively complex, as the following chart shows: 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

11. © RAINER MAURER, Pforzheim - 11 - Prof. Dr. Rainer Maurer USA Germany Decrease in Real Estate Prices Net Wealth Loss of Households Reduction in Con- sumption Demand Reduction in Investment Demand Reduction in Demand for Consumption and Investment Goods from Germany Reduction in Credit Supply by US Banks Loss of Credit Receivables of Ger. Banks Loss of Credit Receivables of US Banks German Consumption Relatively Stable Reduction in Credit Supply by Ger. Banks Reduction in Investment Demand Reduction of Export Demand Reduc- tion of Produc- tion in Ger- many 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

12. © RAINER MAURER, Pforzheim - 12 - Prof. Dr. Rainer Maurer ➤ Fiscal Policy Measures in Germany: ➤ “Konjunkturpaket I” of November 2008 with a total volume of about 100 Bn. €: ◆ Subsidization of building investment: energy saving investments ◆ Subsidization of investment in equipment: extension of write-off possibilities ◆ Extension of child allowances and other family support ◆ Increase of credit supply for midsize companies: Sonderprogramm KfW – Bank 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

13. © RAINER MAURER, Pforzheim - 13 - Prof. Dr. Rainer Maurer ➤ Fiscal Policy Measures in Germany: ➤ “Konjunkturpaket II” of January 2009 with a total volume of about 50 Bn. €: ◆ Reduction of income tax ◆ Reduction of health insurance allowances ◆ Additional Extension of child allowances ◆ Subsidization of private demand for cars (“Cash for clunkers”) ◆ Municipal investment program: Improvement of infrastructure 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

14. © RAINER MAURER, Pforzheim - 14 - Prof. Dr. Rainer Maurer ➤ Monetary Policy Measures: 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

15. © RAINER MAURER, Pforzheim - 15 - Prof. Dr. Rainer Maurer ➤ Geldpolitische Maßnahmen: 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

16. © RAINER MAURER, Pforzheim - 16 - Prof. Dr. Rainer Maurer 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

17. © RAINER MAURER, Pforzheim - 17 - Prof. Dr. Rainer Maurer 3. The Keynesian Model and its Policy Implications 3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession