Chapter 14: Recessions, Expansions, and the Debate Over How to Manage Them Flashcards
Short term economic downturns typically characterized by declines in real GDP growth and increases in the unemployment rate
Recessions
Recessions are caused by:
(1) Declines in AD
(2) Declines in SRAS
(3) Declines in LRAS structure
In the long run, __________________ adjusts to bring the economy back to equilibrium
Short Run Aggregate Supply
Declines in Aggregate Demand lead to:
Deflation
Declines in aggregate supply can be caused by shifts in both _________ and __________ aggregate curves.
(1) Long run
(2) Short run
Recessions caused by SRAS shifts occur when __________.
Input Costs Rise
Great Recessions
- Longer in length than other recessions
- Deeper in effects than other recessions
- Significant problem in the financial market, similar to what happened during the Great Depression
Official # of months in the recession?
18 months
How many years to recover from recession?
4 years
Long Run Aggregate Supply fell in the great recession due to:
(1) An institutional breakdown in the loanable funds market associated with the housing boom
(2) New federal regulations on banks in response to the breakdown
Result of the institutional breakdown in the loanable funds market?
- Real estate values fell in 2007
- Mortgage backed security problems
- FED stepped in, in both ways and levels previously verboten
- Dodd’s Frank Act was placed
The primary regulatory response to the financial turmoil that contributed to the Great Recession
Dodd’s Frank Act
Effects of the Dodd’s Frank Act?
Increased consolidation in the banking industry
Aggregate demand declined during the great recession. It was affected by the:
(1) Decrease in wealth (stocks, bonds, real estate)
(2) Decrease in expected income
Great Recession in Numbers:
Pre Recession (Second Quarter of 2007):
- Unemployment was below 5%
- Real GDP was growing at 3.6%
Fourth Quarter of 2008 (During the Recession):
- Unemployment was 10%
- Real GDP declined at an annual rate of 8.9%
In 2012 (recession officially over):
- Real GDP was growing at a rate of less than 2%
- Unemployment remained at 8%
- World financial institutions remained fragile
Aftermath of Great Recession
Led to a permanent loss of real GDP that the U.S. economy may never recover
What were the main catalysts of the Great Recession when it began in Decemeber 2007?
Falling real estate prices
Great Depression Statistics:
- Economy contracted by 30% from 1929 to 1933
- It took 7 years for real GDP to return to its pre recession level
- Unemployment was 2.2% in 1929 and 25% in 1933
- The unemployment rate was 15% for almost the entire decade of 1930’s
Unemployment comparison between Great Depression and Great Recession
- The unemployment rate during the Great Depression reached 25% and stayed at 15% ten years after it started
- At it highest point, the unemployment rate in the Great Recession was 10%
Great Depression Unique Conditions:
(1) Was two separate recessions (1929-1933 and 1937-1938)
(2) Prices across the economy fell throughout the decade. Deflation!
What was the primary cause of the great depression?
Decrease in aggregate demand
The Great Depression was caused by a decline in aggregate demand which was driven by:
(1) Decline in real wealth
(2) Decline in consumer and business confidence
(3) Three significantly flawed macroeconomic policies
Three significantly flawed macroeconomic policies during the Great Depression:
(1) Decrease money supply
(2) Increase taxes
(3) Smoot-Hawley Tariff Act
Encompasses governmental acts that influence the macroeconomy.
Macroeconomic Policy
Two Types of Macroeconomic Policy:
(1) Fiscal Policy
(2) Monetary Policy
Comprises the use of government’s budget tools to influence the macroeconomy
Fiscal Policy
Involves adjusting the money supply to influence the macroeconomy (decrease money supply)
Monetary Policy
Mistakes with the Fiscal Policy:
(1) They increased taxes in attempt to balance the federal government’s budget
(2) They passed a deeply protectionist trade bill called the Smoot Hawley Tariff Act (a prohibitive tariff)
Mistakes with the Monetary Policy:
(1) The central bank (the FED) decreased the money supply
Classical Economics
- Adjustment towards long run equilibrium will happen naturally
- Prices are flexible and must be allowed to adjust
- Let the economy go and the market will correct itself
Keynesian Economics
- Adjustment will be long and occur unpredictably with many delays
- Prices are sticky
- Call for government interventions in the market
Classical Economics believes the government is _______.
Self Correcting
Policies of Classical Economics:
(1) Pro-market, laissez faire
(2) No significant role for government intervention in macroeconomic policy
(3) Focus on long-run growth
John Maynard Keynes
- British economist
- The General Theory of Employment, Interest, and Money
- Theory of persistent cyclical unemployment
- Believed that wages are sticky downwards meaning that wages, by their nature, are very reluctant to ever decrease, even during terrible economic conditions
- High wages prevent labor markets reaching equilibrium and restoring full employment, creating a prolonged recession
