ECON 402 Intro March 30 2016-2 - ECON 402 Intro ECON 402...

This preview shows page 1 out of 19 pages.

Unformatted text preview: ECON 402 Intro ECON 402 – Spring 2016 What is Macroeconomics? Macroeconomics is the study of what is happening to the economy as a whole, the economy-in-the-large, the macroeconomy. What do Macroeconomists Do? Macroeconomists’ principal tasks: To try to figure out why overall economic activity rises and falls: the value of production, total incomes, unemployment, inflation. Intermediate variables like interest rates, stock market values, and exchange rates play a major role in determining the overall levels of production, income, employment, and prices. Why Macroeconomics Matters Three reasons 1. Cultural literacy 2. Self-interest (understanding the situation you are in) 3. Civic responsibility – your duty to vote, and to understand whether who you are voting for is a lying scumbag can deliver what he or she promises. Key Concepts Fallacy of Composition Paradox of Thrift Self-fulfilling prophecies, a.k.a. “sunspot” equilibria Animal spirits Macroeconomic Policy Growth policy: nothing matters more in the long run for the quality of life in an economy than its long run rate of economic growth. “A rising tide lifts all boats.” U.S. GDP Bad Growth Policy… Stagnant Per Capita Income U.S. Real Disposable Personal Income Per Capita 0.25 0.2 0.15 Trailing 5.5 year growth rate 0.1 0.05 0 -0.05 Declining Volatility Since Reserve Act of 1930 Volatility of Nominal GDP 16 14 12 10 8 15 Year Rolling Std Dev of YoY % Change 6 4 2 0 So Reduced Volatility is Good, Right? So what could possibly be wrong with ‘price stability’ and lower volatility in overall nominal output? How could reducing the frequency and severity of recessions be a bad thing? The answer is that artificially suppressing the amplitude of the business cycle paints a false perception of the underlying levels of risk. In effect, the Fed’s manipulation of the credit cycle over the course of its existence had (until 2008) convinced consumers, businesses, and local governments that business cycle risk was a thing of the past. So America, en masse, did the obvious: dissave and take on levels of debt that were inconsistent with the real level of economic risk. Debt, debt everywhere... U.S. Total Credit Market Debt Obligations (TCMDO) U.S. Total Credit Market Debt Obligations (TCMDO) Leverage? Leverage Ratios: Major U.S. Financial Institutions 2003-2007 120 100 80 60 40 20 0 2003 2004 Lehman Brothers Goldman Sachs 2005 Bear Stearns Morgan Stanley 2006 2007 Merrill Lynch Federal Reserve (Q4 2015) 2013 See FRB H.4.1 Release, Table 5 The True State of Unemployment This One’s Even Worse… Labor Force Participation Rates, by Age 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Participation rate 1994 Participation rate 2014 Participation rate 2004 Participation rate Projected 2024 Employment Ages 25-54 Nearly 1 in 4 Americans in Prime Working Age are Not Employed Unemployed or Not in Labor Force; 29,542,711 Employed; 71,517,289 Inactivity Ages 25-54 U.S. Individuals Ages 25-54 Inactivity Rate 0.3 0.25 0.2 0.15 0.1 0.05 0 Unemployed or Not in LF ...
View Full Document

{[ snackBarMessage ]}

Get FREE access by uploading your study materials

Upload your study materials now and get free access to over 25 million documents.

Upload now for FREE access Or pay now for instant access
Christopher Reinemann
"Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

Ask a question for free

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern