Econ102-Spring-2008

Econ102-Spring-2008 - Econ 102 Macroeconomics The Current...

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Econ 102 Macroeconomics The Current Economy Steven W. Rick University of Wisconsin
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2 Recent Economic Trends 1. The credit/liquidity crisis threatens to derail the U.S. economy 2. The Federal Reserve is trying to break the chain in the downward economic spiral by easing monetary policy in an attempt to liquefy the banking system and calm the credit markets 3. Government officials are drafting a fiscal policy stimulus plan 4. The housing market is slowing rapidly and causing a decline in home prices 5. Falling home prices will restrain consumer spending 6. A weaker dollar and strong overseas economies will keep export growth strong. The global trade imbalance correction has begun 7. Rising energy prices will have a negative real income effect on consumers 8. Households have a near zero savings rate 9. Capital funds now flow from poor to rich countries 10. Uncertainty (asymmetric information) over who’s holding the toxic mortgage investments (CDOs) has dried up the interbank lending market Long-term Economic Trends 1. China’s entry into the global economy will have profound effects on inflation, wages, and interest rates for the next 50 years 2. World economy is becoming less dependent on U.S. economy 3. Massive U.S. current account deficits => question of America’s foreign borrowing sustainability 4. Massive U.S budget deficits 5. Worldwide savings and investment patterns must shift towards a healthier balance
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3 Real Fed Funds (fed funds - core CPI) -8 -6 -4 -2 0 2 4 6 8 10 12 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 4.25% - 2.3% = 1.95% 4% = Recession causing level Inverted Interest Rates and Recessions 1988-2008 0 1 2 3 4 5 6 7 8 9 10 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0 1 2 3 4 5 6 7 8 9 10 Recession Fed Funds 10-yr Treas Do Inverted Yield Curves => Recessions?. ....No High short-term real interest rates => Recessions Inverted Yield Curve Inverted Yield Curve
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4 Economic Growth Point 1. The U.S. economy is able to absorb many shocks (falling stock prices, accounting scandals, rising energy prices, wars, terrorist attacks) and continue to grow 2. Productivity growth reflects strong economic fundamentals 3. Falling dollar will increase net exports 4. The supply side tax cuts in June 2003 (lower marginal income tax rates, and lower dividend and capital gains tax rates-15%,) are stimulating work and investment 5. Profits per unit of GDP were the highest in 4 decades because of recent restructuring and cost saving initiatives. 6. Firms have a lot of cash but will only invest if expectations of economic growth are robust Counter Point 1. Resource utilization rates are falling (higher unemployment rate, higher building vacancy rate, lower capacity utilization rate) 2. Growth will be below long-term sustainable (potential) rates for an extended time due to slowing housing and manufacturing 3. State and local governments face lower sales and property tax revenues which will constrain spending 4. Weak housing construction will shave 0.5% off GDP growth 5. Falling home prices will decrease home equity borrowing and consumer spending 6.
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This note was uploaded on 03/27/2008 for the course ECON 102 taught by Professor Drozd during the Spring '08 term at Wisconsin.

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Econ102-Spring-2008 - Econ 102 Macroeconomics The Current...

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