Applying Macroeconomic Theory

Statement: "All this frugality is producing a consumer-generated recession. What is needed is some policy action to stimulate consumer spending to move the economy out of its current lassitude."

1. What is a consumer-generated recession?

2. What type of policy action could stimulate consumption?

3. How would stimulating consumer spending move the economy out of recession?

4. How would you forecast what consumers are likely to do?]

5. How does the savings rate affect the current economy? the future economy?

Statement: "Changes in inventories go a long way, for instance, toward explaining why first-quarter GDP was ahead of a year ago by a meager 1.7 percent"

1. What seems to be happening to inventories during the first quarter?

2. Does the change appear to planned or unplanned?

3. How would this relate to firm production?

Statement: "The federal government will be prevented by the size of the deficit from taking any action to stimulate the economy. The only possible source of stimulus is a decrease in the personal savings rate.”

1. What action could the government take to stimulate the economy? Why would a budget deficit constrain this action?

2. How would a decrease in the personal savings rate serve as a source of stimulus?

Statement: "Weak markets will lead to a rapid drop in the rate of business capital spending during the next year, which in turn will increase unemployment."

1. Why would capital spending drop?

2. Why would this increase unemployment?

Statement: "In a loose sense, we are all Keynesians now--all of us, at any rate, who reject the notion that a sick economy heals itself by "natural" recuperative powers, without government action."

1. Explain why rejecting this notion makes us Keynesians.

2. Why type of government actions are we talking about?

Statement: "For Canada, the demand pressures generated by the U.S. tax cut and the spillover effects of increased U.S. defense spending will push the Canadian economy further into an excess demand situation."

1. How will the U.S. tax cut and defense spending affect the U.S. economy?

2. Why would it also increase effective demand in the Canada?

Statement: "There have been times when the federal government has kept pumping fiscal stimulus into the economy when it was already growing vigorously and did not need the boost. The result was__________ .

1. Complete the last sentence.

Statement: "The extent of the downturn surprised analysts. Real GDP fell at an annual rate of 4 percent, but without an apparent unplanned buildup of inventories the rate of decline is estimated to be 7 percent.

1. What is the logic behind the 7 percent figure?

2. What is the relevance of unplanned buildup of inventories?

Statement: "What cannot be done is to impose on any government the obligation to balance its budget continuously. Such an obligation, if it did work, would introduce a major destabilizing element."

1. What's the logic behind this statement?

Statement: "The U.S. economy should have enough vigor to continue growing for the rest of the decade, despite the braking effect of budget deficit reduction."

1. Explain braking effect of budget deficit reduction.

Statement: "The conference was told that the country is headed for a big inventory liquidation that will keep the recession going well into next year."

1. Explain how a inventory liquidation keeps a recession going.