Part B Calculating and Understanding Real GDP In the 2011 recession GDP rose by 190 billion How can this be Shouldn t GDP fall in a recession Real GDP Say just 2 things are produced doctor visits and cars 2013 100M visits 50 each 10M cars 20 000 each 2014 103M visits 53 each 11M cars and 20 500 each Base year 2013 Q Real GDP in 2014 would be A 100M 50 10M 20 000 B 100M 53 10M 20 500 C 103M 50 11M 20 000 D 103M 53 11M 20 500 nominal GDP i e P Q for every good in GDP and sum all Real vs Nominal GDP Both use same Q amounts produced Prices P different how value prod Year Prices of nominal GDP 2014 2007 2014 2007 Prices for real GDP 2009 2009 Base year for real GDP now 2009 updated every decade or so Other names nominal GDP current dollar GDP real GDP constant dollar GDP chained GDP Q Which of the following would be considered money in the U S Keep in mind that currency is the same as cash A cash B cash funds in checking accounts C cash funds in checking accounts savings bonds D cash funds in checking accounts savings bonds corporate stock E cash funds in checking accounts savings bonds corporate stock capital Q There was inflation over this period that is the prices of all goods rose Which is real GDP A red line B blue line Real GDP use base year 2009 P Q Real GDP Nominal GDP is year 2009 why compared 2009 prices it inflated in 2009 Real GDP Nominal GDP in year 2009 base year Q In a recession production declines Also the U S almost always has inflation With these in mind which is most likely to fall in a recession Real GDP is most often used to track the economy It was 16 2 trillion in 2014 III nominal GDP was 17 6 trillion Q In 2014 III real GDP was 16 2 trillion and in 2013 III it was 15 8 trillion What was the annual economic growth rate the percentage change in real GDP A real GDP B Nominal GDP Real GDP A 15 8 16 2 16 2 B 16 2 15 8 15 8 C 15 8 16 2 15 8 D 16 2 15 8 16 2 2013 III to 2014 III 2 5 But from 2014 II to 2014 III it was 5 0 fastest since the Great Recession of 2007 2009 economic growth accelerated more hiring Annual Economic Growth Rate most recent value initial initial I II Don t understand why GDP is so much higher now then it was Surprising Income grew to GDP economy grew a lot GDP goes down during recessions Expansions are the periods in between In the earlier period 4 recessions because of the things causing them Later times there were less recession to less causes Real GDP and the Great Recession 2007 2009 Real GDP fell about 0 6 trillion 4 2 Most severe downturn since the Great Depression of the 1930s 33 Lead to a rise in the unemployment rate from 4 5 to 10 now 5 6 To deal with it the federal government Increased expenditures so G and trans 1 2 Cut taxes to cushion falls in C and I 3 There are fiscal policy changes in the federal budget The Federal Reserve i e the Fed 1 cut interest rate to stimulate C and I monetary policy 2 aided the financial system together generally thought to have kept us from something much worse End of Part B Calculating and Understanding Real GDP In the 2001 recession GDP rose by 190 billion How can this be Shouldn t GDP fall in a recession Q Which do you think rose A real GDP B nominal GDP Real GDP fell by 40 billion Part C Fiscal and Monetary Policy Q To aid those unemployed during a recession or period of slow growth like today what can the government do Interest Rates They matter a lot Ex student loans Stafford Now 4 66 2007 7 0 Average Debt Penn State Grad 35 000 Monthly Repayments over 10 years 4 66 365 What they are rate at which we borrow and lend Where do they come from 1 supply and demand by borrowers and lenders 2 monetary policy influences them 7 0 406 4 900 more in total Monetary Policy Conducted by the U S Federal Reserve U S central bank conducted by Congress most key positions appointed by the President and confirmed by the Senate Chair Janet Yellen also heads the Federal Open Market Committee FOMC Congressional mandate to the Fed promote effectively the goals of maximum employment stable prices and moderate long term interest rates 2 inflation Janet Yellen on recent economic development 12 17 15 Goal of maximum employment Job gains strong Unemployment rate down Room for further improvement o Can t find jobs want full time given up looking Real GDP Inflation Robust in 3rd quarter 5 2 5 last year 2 objective impact on oil prices decreases How does the Fed influence the economy conduct monetary policy Influence interest rates or Change the money supply M1 or M2 Federal Funds rate what banks charge each other for overnight loans The Fed sets this rate Banks profit by borrowing at lower rates than what they lend at Ex rate on checking accounts car loans Ex The Fed federal funds rate Higher costs for banks Loan rate for consumers and firms More expensive to buy with borrowed funds Slower growth i e real GDP Q When the Fed is most concerned about the number unemployed underemployed and have quit looking what do you think the value of the federal funds rate might be low A B medium C high encouraging borrowing and spending potential solution Janet Yellen on the FOMC s views on the federal funds rate after their last meeting Federal Open Market Committee FOMC Federal funds rate target Patient in beginning to normalize the state of monetary policy Federal funds rate car and credit rates Depends on growth of economy federal funds rate Q If the federal funds rate falls all else equal GDP will likely and component s of GDP will change GDP C I G NX A Fall 1 B Fall 2 C Rise 1 D Rise 2 But can the current federal funds rate be cut NO Sample Quiz Questions 1 Which of the following is the least likely to be investment a A household buying a new house b A household saving for retirement c GM building a new factory d A car dealer adding to its cars on hand 2 About how many jobs did the U S economy add last month a 100 000 b 100 000 and 200 000 c 200 000 and 300 000 d 300 000 Fiscal Policy change in federal expenditures and taxes are changed independently controlled by the President and Congress Q If federal taxes fall all else equal GDP will likely and G will fall fall A B fall be unchanged C …