10-8-09 - ECONOMICS 100B Professor Martha Olney 10/8/09...

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ECONOMICS 100B Professor Martha Olney 10/8/09 Lecture 13 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Outline Real Exchange Rate NX = GX – IM From Y = AD to S = I Role of Interest Rate In the News Hello. Welcome back. Before we start, there are two pieces of news that I would like to share with you. First, from the Calculated Risk Blog (CalculatedRiskBlog.com), the Fed has issued its monthly report on consumer credit for the month of August. Consumer credit means non-mortgage credit. Outstanding consumer credit debt experienced a 13% drop. This is the largest drop ever. We are in unchartered territory here. Non- revolving credit, such as student loans, auto loans, and personal loans fell by 1.5%. This number is low due to the Cash for Clunkers program, which spurred car sales in the month of August. As a result, auto sales were concentrated in that month rather than spread out. If consumers are paying down debt, are they spending? They are not spending. Paying down debt is categorized as savings according to macroeconomists. In the short-run, this does not help the recession. This is not behavior that is consistent with the idea that consumers will lead us out of the recession. This is evidence that consumers are balancing their balance sheet. The difference between what you own, assets, and what you owe, liabilities, is your household balance sheet. By paying down debt, people are getting their household balance sheets back in order. This may be a precursor to consumers spending more again once they get their debt down to a more manageable level. On the other hand, there may have been a cultural shift in attitudes toward the propriety of debt. In the 1980s and 1990s, there was in American culture a strong consumerist mentality. However, there seems to have been a shift away from this culture of spending as if there’s no tomorrow, borrowing against your house, and going into debt to finance your expenses. If this is the case, then this rebalancing will not be followed by an increase in spending. It seems that consumers will not be the ones to lead us out of the recession. While this is good for individuals, this is not necessarily good for the economy. Student: So if people are saving more, it will be good for long-run growth. But Keynes said that in the long-run we are dead. Also, when we save more, we are spending less. This precisely characterizes the tension between the
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This note was uploaded on 02/04/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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10-8-09 - ECONOMICS 100B Professor Martha Olney 10/8/09...

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