Case Studies 1_1 - CASE STUDY EXTENSION 1-1 The Recent...

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CASE STUDY EXTENSION 1-1 The Recent Behavior of the U.S. Economy: A Guide to the Case Studies Many of the case studies in the textbook address the recent history of the U.S. economy. Taken together, the case studies provide a picture of the U.S. economic experience during this century, and particularly the last 15 years. The following is an overview: For a basic picture of U.S. economic performance, the Chapter 1 case study “The Historical Performance of the U.S. Economy” shows the behavior of real GDP, inflation, and unemployment since 1900. The long-run picture shows that GDP grows through time, although this growth is often interrupted by recessions, most recently in 2001. The Chapter 8 case study “The Worldwide Slowdown in Economic Growth” notes the slowdown in the long-run growth rate experienced by the United States and other countries from the early 1970s through the mid-1990s. Another Chapter 8 case study highlights the apparent pick-up in long-run growth for the United States since the mid-1990s. The Chapter 13 case study “Inflation and Unemployment in the United States” shows unemployment and inflation over the past four decades and reveals in particular the stagflation (high unemployment and inflation) of the 1970s; this contrasts with the relatively stable growth of the 1950s and 1960s. The Chapter 9 case study “How OPEC Helped Cause Stagflation in the 1970s and Euphoria in the 1980s” explains how the experience of the 1970s was in large measure the result of supply shocks associated with increases in the price of oil. The United States thus entered the 1980s with very high inflation rates by historical standards. Eliminating this inflation was a top priority for Federal Reserve chairman Paul Volcker, who pursued a tight monetary policy. Nominal interest rates rose in the short run, but fell in the longer run as the inflation rate fell, as discussed in the Chapter 10 case study “Does a Monetary Tightening Raise or Lower Interest Rates?” As a result of these policies, the U.S. economy also entered its most severe contraction since the 1930s. Although monetary policy was contractionary, fiscal policy in the 1980s was expansionary. Taxes were cut and spending rose. The fall in government saving (rise in the government deficit) caused the debt to reach a level unprecedented in peacetime (see the Chapter 15 case study “The Troubling Outlook for Fiscal Policy” for a long-run perspective on the debt). Ultimately, the tight monetary policies did succeed in decreasing inflation and inflation
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Case Studies 1_1 - CASE STUDY EXTENSION 1-1 The Recent...

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