U. S. Productivity Growth:

Transcription

1 Macro Lecture 12: Late 1990s, the 2000s, and Mortgages Productivity Growth: Most economists expected the general decline in productivity growth 8 occurring during the 1950 s, 1960 s, 1970 s, and 1980 s 6 to continue. To the surprise of nearly 4 everyone, however, productivity growth rose in the 1990 s as 2 illustrated in figure U. S. Productivity Growth: Decade averages also show the same 2 reversal as seen in Table 12.1 and figure Figure 12.1: U.S productivity growth: Productivity rose in the last decade of the 20 th century after declining in the previous four decades. Decade Growth (%) 1950 s s s s s 2.06 Table 12.1: Average U.S. productivity growth by decade (%) There is no consensus about why this has happened although there is much speculation. Some argue that personal computers have increased the productivity of workers. Many believe the arrival of made possible by the internet is also responsible s 1960 s 1970 s 1980 s 1990 s Figure 12.2: U.S productivity growth by decades

2 2 Clinton Years: Table 12.2 reports the data from the mid-1990 s. Once again, we apply the adaptive expectations Adaptive Expectations: The expected inflation rate depends on the actual inflation rate in the recent past. More specifically, we assume that the expected inflation rate in a given year equals the actual inflation rate in the previous year , , , , , , , , Table 12.2: Clinton years macro data: We begin by considering the aggregate supply curves: Long run aggregate supply 2.25 (LRAS) curve: Table 10.2 AS 1995 reports that the economy experienced productivity growth during this period. The rise in productivity during the 1990 s increased 1.75 potential GDP. This positive permanent supply shock 1.50 shifted the long run aggregate supply (LRAS) curve right as AD 1995 shown in figure Aggregate supply (AS) curve: Applying the adaptive expectations principle, the 1.00 expected inflation rate fell modestly during this period 9,500 10,000 10,500 11,000 11,500 from 2.1 to 1.7 percent as Figure 12.3: Clinton years: reported in table Since the aggregate supply (AS) and long run aggregate supply (LRAS) curves intersect at the expected inflation rate, the point at which aggregate supply (AS) and long run aggregate supply (LRAS) curves intersect shifted down from 2.1 to 1.7. The movements of the aggregate supply (AS) and long run aggregate supply (LRAS) curves are illustrated in figure LRAS 1995 LRAS 1998 AD 1998 Next, we turn our attention to the aggregate demand (AD) curve. As reported in table 12.2, government purchases increased from 2,260 to 2,370 causing the aggregate demand (AD) curve to shift right during this period. Table 12.3 summarizes what occurred in the mid-1990 s: LRAS curve AS curve AD curve Productivity growth rate falls fiscal policy LRAS curve shifts right AS curve shifts down AD curve shifts right Table 12.3: Aggregate supply and demand ,000 AS 1998

3 3 Early 2000 s Table 12.4 reports the data for the early 2000 s. Once again, we apply the adaptive expectations , , , , , , Table 12.4: Macro data for Figure 12.4 illustrates the shifts in the aggregate demand and supply 3.0 curves. This helps us understand AS 2001 what occurred. AS 2003 We begin by considering the aggregate supply curves. In 1995, a long run equilibrium existed because the actual inflation rate equaled the expected inflation rate; both equaled 2.3 percent. Since the aggregate supply (AS) curve intersects the long run aggregate AD 2001 supply (LRAS) curve at the expected inflation rate, the two 1.0 AD 2002 AD 2003 aggregate supply curves intersect at ,500 13, Long run aggregate supply (LRAS) curve: The rise in productivity in Figure 12.4: Early Bush years: and 2003 increased potential GDP (see table 10.4). This permanent positive supply shock shifted the long run aggregate supply (LRAS) curve right in both years as shown in figure Aggregate supply (AS) curve: The aggregate supply (AS) curve intersects the long run aggregate supply (LRAS) curve at the expected inflation rate. o : Since the expected inflation rate remained at 2.3 percent, the AS and o LRAS 2001 LRAS 2002 LRAS 2003 LRAS intersect at 2.3 as illustrated in figure : The expected inflation rate decreased from 2.3 percent to 1.5; hence, the aggregate supply (AS) curve now intersects the long run aggregate supply (LRAS) curve at 1.5 as illustrated in figure Table 12.5 summaries the shifts of the aggregate supply curves: LRAS curve AS curve LRAS curve AS curve Productivity growth rate the same Productivity growth rate decreased LRAS shifts right AS shifts down LRAS shifts right AS shifts down Table 12.5: aggregate supply (AS) curve AS 2002

4 4 Next, we turn to the aggregate demand (AD) curve: : Government purchases increased. This expansionary fiscal policy shifted the aggregate demand (AD) curve right : Government purchases increased modestly. Also, Congress passed and the President signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 which reduced taxes. These two expansionary fiscal policies shifted the aggregate demand (AD) curve right again. Table 12.6 summarizes the shifts of the aggregate demand (AD) curve: Fiscal policy Fiscal policy AD curve shifts right AD curve shifts right Table 12.6: Aggregate demand (AD) curve Late 2000 s Table 12.7 reports the data for the late 2000 s. Once again, we apply the adaptive expectations , , , , , , Table 12.7: Macro data for Figure 12.5 illustrates the shifts in the aggregate demand (AD) and aggregate supply (AS) curves that help us understand the data: 3.0 AS AS AS AD AD ,400 14,500 14,600 Figure 12.5: Late Bush years: AD ,700 14,800 14,900 15,000

5 5 Aggregate Supply (AS) Curve The expected inflation rate fell from 3.1 to 2.7 to 2.0 percent. Since the aggregate supply (AS) curve intersects the long run aggregate supply (LRAS) curve at the expected inflation rate, the aggregate supply (AS) curve shifts down as seen in figure Table 12.8 provides a summary: Aggregate Demand (AD) Curve A Puzzle Government purchases increased, albeit modestly, yet the aggregate demand (AD) curve shifted left as illustrated in figure Table 12.9 provides a summary: rate falls rate falls AS down Shifts down Table 12.8: Aggregate supply (AS) curve Fiscal Policy Fiscal Policy AD shifts right AD shifts right Table 12.9: Aggregate demand (AD) curve puzzle Business and Consumer Confidence Claim: Changes in consumer and/or business confidence shift the aggregate demand (AD) curve. Increases in confidence shift the aggregate demand (AD) curve right Decreases in confidence shift the aggregate demand (AD) curve left. Figure 12.6 illustrates the effect of a decline in consumer confidence: FP Question: What would the real AD Question: How many final goods and interest rate (r) equal, if the inflation rate services would be purchased if the inflation rate () were percent, given that the () were percent, given that all other Fed does not change its inflation policy? factors relevant to demand remained the same? FP At a given inflation rate () Consumer and/or business confidence decline Households and/or firms purchase less r (%) Fewer goods and services purchased Figure 12.6: Decline in Consumer Confidence AD AD Aggregate demand (AD) curve shifts left We will now show that the home mortgage crisis plays a key role. But first we must learn a little about how home mortgages work.