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CAS EC 102 (215)
Lecture 5

PM Lecture 5 Aggregated Supply and Demand II.pdf

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CAS EC 102
Jay Zagorsky

PM Lecture # 5: Aggregated Supply and Demand II Wednesday, March 26, 2014 11:17 PM Counter cyclical fiscal policy - Rise and fall in the GDP and the governmentspends in the attempt to counter the spending done by the others ○ Stimulus packages Franklin Roosevelt'sNew Deal - During the first 100 days in office starting in 1933,Rooseveltproposed and enacted ○ Program to bring recoveryto business ○ Agriculture program ○ Relief to the unemployed  1st big program was called the Civilian ConservationCorps (CCC) □ CCC hired unemployed young men and sent them to rural areas and forests where they planted trees, created roads and drained swamps  Paid $25 per month, $20 automaticallysent back home to the family □ CCC also prevented the spread of communism  Politicians were very concerned about the growing number of young homelessmen ○ Relief to those in danger of losing farms and homes ○ Establishment of the Tennessee Valley Authority  Biggest goal was to provide cheap power to an area with very little electricity  Cheap power brought in many businesses and factories which increased employment and made the area much wealthier  Was not a quick stimulus but instead a multi-generational transformation  Peak employmentof 28,000is not a lot given millions were unemployed Second New Deal 1935 - Created Social Security - Heavy taxes on the wealthy - New controls over banks and public utilities - Enormouswork relief program for the unemployed called Works Progress Administration (WPA) Effects of the New Deal - The New Deal packages were not free lunches, total federal debt soared to $40 billion by 1939 - In Romer's survey of the Great Depression's "Sources of the American Recovery,"New Deal is not mentioned ○ Devaluing currency and expanding the money supply - "New Deal programs created during the first 100 days and afterwards moved the economy towards recoveryand helped to lessen the Depression's impact on citizens, but the effects of the Great Depressionstubbornly held an into the early 1940s" World War II - 1939 ○ September 1st: Germany invades Poland ○ September 3rd: Britain, France, Australia, and New Zealand declare war on Germany - 1940 ○ June 10th: Italy declares war on Britain and France ○ June 14th: German army enters Paris ○ US did not comeimmediatelyto the military aid and English or French, instead it began sending food and supplies to these allies - 1941 ○ December7th: Japanese attack on Pearl Harbor ○ December11th: Germany declares war on USA ○ These two events cause a massive mobilization and armament in the US - 1945 ○ May 7th: German unconditional surrender ○ August 6th & 9th: Atomicbombs dropped on Japan ○ August 14th: Japanese surrender What was Impact of WWII on Real US GDP? - From 1939 to 1944,US economyalmost doubled in size - Best multiple year performance for US ever. Boom late 1990s result in 20% gain over 6 years Best multiple year performance for US ever. Boom late 1990s result in 20% gain over 6 years What Happened to Prices US CPI? - Prices starting in 1939 climbed steadily upward - By 1948 consumerprices had risen over 70% Why Didn't Prices Jump More? - During Civil War price jumps were huge ○ 1863,CPI increased by 23% in 1864CPI increase was 27% - Gov't created Office of Price Administration ○ Rationed key items like gas, sugar, chocolate,utter, coffee, and meat ○ Rations stamps and books became another type of currency in the US economy Fed's Problem - The Feds had a severe problem; using the money supply it can either ○ Control interest rates or control inflation but CANNOT do both - During the war, the Fed Gov't borrowed massively ○ In 1939,debt was $40 billion ○ In 1945,debt was $260billion ○ Debt interest was huge - The fed decided to keep interest rates low but lost control of prices How to Create a AS-AD Graph? - Decide where economyis initially ○ Is AS-AD intersection to right of long-run AS (overcommittedresources) or left of long-run
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