It looked like the sun wouldn't set on the market in 1929.
The pace of selling quickened for 8 years in a row.
By the end of the expansion.
A typical American family lost more than 40 billion dollars of wealth in the Great Crash of 1929.
Rich men became penniless overnight and went to the movies for the first time.
Families lost their savings, homes, and even their running at capacity, as well as anyone who wanted to work, with factories.
The damage was not limited to Wall Street.
Everyone was positive.
The farms, banks, and industry were engulfed in flames in his acceptance address.
In November 1928, President-elect Herbert Hoover echoed this, as millions of rural families lost their optimism.
The last triumph over poverty in the history of the automobile was in 1929, when production fell from 4.5 million cars to 1.1 million.
Many banks were forced to sell their land.
The stock market seemed to confirm this.
Billions of dollars were added to the wealth of continued to swell as the ranks of the unemployed more than doubled.
The stock market boom force was out of work.
After a year, the total was over 9 percent, causing stock prices to double again and millions of additional workers to get by on less than 2 years.
The stock market made it look easy to work.
Things got worse.
By 1933, you should be rich in America.
On October 24, 1929, the party ended abruptly.
Black Thursday, the stock market Wall Street, came to be because of what slept in the streets, scrounging for food and selling apples on.
The market value of the U.S. seemed to last forever in a few hours.
In 1933, Roosevelt lamented that one-third of the nation was ill as Pres porations plummeted.
President Hoover tried to assure clothed, ill-housed, and ill-fed.
Thousands of unemployed America's stockholders marched to the Capitol to demand jobs and aid.
The stock workforce was still not active 9 years after Black Thursday, despite his assurances.
The stock markets of the country were on the verge of collapse yesterday as a prosperous people went hysterical.
The frenzied hands of a thousand brokers on the floor of the volume of securities.
The New York Stock Exchange was flooded with orders.
The result was a financial nightmare, comparable to nothing.
It shook the financial district to its foundations, overwhelmed its mechanical facilities, and chilled its blood with terror.
The stock markets show confidence in the economy.
People are less willing to hold stocks if they have doubts about the economy.
The self-confidence of the economics profession was damaged by the Great Depression.
Nobody could explain the Depression.
The short-run business cycle is explained by alternating pe mists.
We'll show you some of the policy options the government might use to reduce economic growth.
Prior to the 1930s, economists thought the Great Depression would never happen.
There was no need for the government to intervene.
In the first 30 years of the twentieth century, the U.S. economy experienced some bad years in which the nation's output declined and unemployment increased.
Classical economists propounded an optimistic view of the macro economy in this environment.
The economy adjusts to deviations from its long-term growth trend according to the classical view.
Producers sometimes reduce their output and throw people out of work, but they don't cause a lot of damage.
The internal forces of the marketplace would quickly restore prosperity.
Economic downturns were seen as temporary setbacks.
Flexible prices and flexible wages were cornerstones of optimism.
If they couldn't sell all of their output, they had two options.
They could either reduce the rate of output or the price of output, which would cause an increase in the quantity demanded.
All the output produced can be sold if prices fall far enough.
Flexible prices that would drop when time period increases as consumer demand slows--virtually guaranteed that all output could be sold.
Flexible prices have the same counterpart in factor markets.
If some workers were temporarily out of work, they would compete for jobs with lower wages.
Producers would find it profitable to hire more workers as wage rates declined.
Flexible wages would ensure that everyone would have a job.
Say's Law summarized the optimistic views of the macro economy.
All workers would be hired.
Unemployed labor and unsold goods could emerge in this classical system, but they would disappear as soon as people adjusted prices and wages.
There was no Great Depression in this view of the world.
The classical self-adjustment mechanism didn't work.
Classical economic theory was destroyed by the Great Depression.
There would be a natural tendency towards optimum employment of resources in a society which was functioning after the classical postulates.
It is possible that the classical theory is the way in which our Economy should behave.
It is not possible to assume our difficulties away.
Keynes developed an alternative view of the economy.
Keynes said that the economy is inherently unstable.
Keynes argued that the Great Depression was a calamity that would recur if we relied on the market mechanism to self-adjust.
We can't afford to wait for the economy to improve before we act to protect jobs and income.
The government can "priming the pump" by buying more output, employing more people, providing more income transfers, and making more money available.
When the economy gets too hot, the government needs to raise taxes, cut spending, and reduce money.
Keynes did not end the macroeconomic debate.
The stability of the economy continues to be debated by economists.
There are debates in the next few chapters.
Let's take a quick look at the economy's performance.
The upswings and downturns of the business cycle are measured by changes in total output.
An economic upswing is an increase in the volume of goods and services.
The total volume of production can decline in an economic downturn.
Employment changes mirror production changes.
The stylized features of a business cycle are depicted in Figure 8.2.
The economy's output grows at a rate of 3 percent per year over the long run.
There is a lot of variation around this growth trend.
The short-run cycle looks like a roller coaster, climbing steeply, then dropping from its peak.
The upswing starts again once the trough is reached.
Business cycles aren't as regular as suggested by Figure 8.2.
The U.S. economy has experienced many upswings and downswings.
The business cycle is similar to a roller coaster.
Real GDP is increasing again.
If there is a trough, what forces cause it?
The figure shows the performance of the U.S. economy since 1929.
The growth of real GDP has been adjusted for inflation.
Americans now consume more goods and services in larger quantities than before.
Our long-term success in raising living standards is clouded by a series of shortterm setbacks.
The years of above-average growth seem to change.
Figure 8.3 shows the short-run instability.
The U.S. economy grew at an average rate of 3 percent per year from 1929 to 2007.
Figure 8.3 shows that we didn't grow as well as we could have.
Real GDP grew by less than 3 percent many times.
The essence of the business cycle is the successive short-run contraction and expansions.
Between 1929 and 1933, the U.S. output declined steadily.
The growth rate is negative in each year.
Investments in new equipment ceased.
The National Archives provides a World View.
The rate of output was still below the Library by 1937.
Things got worse again.
More people lost their jobs when output contracted again.
In a single year, real GDP grew almost 19 percent.
Everyone was employed in the factories or in the armed forces.
America's productive capacity was strained to the limit during the war.
There have been 11 recessions since 1944.
After World War II ended, the real GDP for two or recession was the most severe.
The postwar recession was brief.
Demand for consumer goods and investment spending helped restore full employment.
The Great Depression was not limited to the U.S. economy.
Over a period of many years, most other countries suffered substantial losses of output and employment.
Industrial production around the world fell 37 percent.
China and Japan were less affected by the Depression because they were relatively isolated from world trade and finance.
Nations are tied together by international trade and financial flows.
Other nations lost export sales when the U.S. economy fell in the 1930s.
The Great Depression was a worldwide calamity.
There were two recessions in the 1980s, the second lasting 16 months.
Real GDP increased in 1981 despite the second recession.
The period ers rose that year.
The economy expands too slowly.
When real GDP contracts, there is a recession.
When you don't get socks for Christmas, a depression is an extremely deep and long recession.
The U.S. economy went through a 7 year expansion in 1982.
Over 20 million new jobs were created during that period.
Real GDP began to decline in July 1990.
When total output in the economy goes down, there is a recession.
The recession destroyed 2 million jobs and reduced output by 2% by the end of 1991.
The late 1990s saw the creation of millions of new jobs.
In the fall of 2000, the national unemployment rate fell to 3.9 percent, the lowest in over three decades, and the economic expansion set a longevity record.
The United States experienced a brief recession in 2001 due to the 9/11 terrorist attacks.
In 2002 GDP growth resumed.
There is some validity to the idea of a recurring business cycle because of the bumpy growth record of the U.S. economy.
Every decade has at least one boom or bust cycle.
The historical record doesn't really answer our questions.
Keynes and the classical economists weren't debating whether business cycles occur or not, they were debating whether they're an appropriate target for government intervention.
The debate continues.
We need to understand the origins of the business cycle to figure out how the government should try to control it.
The stage for answering these questions is set in Figure 8.4.
The diagram shows a bird's eye view of the economy.
The model emphasizes that the performance of the economy depends on a small set of factors.
The primary measures of macroeconomic performance are arrayed on the right side of Figure 8.4.
The primary outcomes of the macro economy are output of goods innovation, and spending patterns; external shocks such as wars, and services (GDP), jobs, prices, economic growth, and interna weather, and trade disruptions; and policy levers such as tax, bud tional balances (trade, These outcomes are a result of regulatory decisions.
The number of jobs created, price stability, and rate of economic expansion are some of the macro outcomes that define our economic welfare.
We want to maintain a balance in our international trade and financial relations.
The economy's performance is rated on five macro outcomes.
There are three broad forces depicted on the left side of Figure 8.4.
It would produce output, create jobs, and possibly even grow.
Many less developed countries are not connected to government or international events.
Macro outcomes depend on internal market forces.
The question of whether pure, market-driven economies are stable or unstable is important.
Keynes said policy levers were both necessary and effective.
Keynes believed that the economy was doomed to bouts of failure without intervention.
Policy intervention is not given a great role by modern economists.
Policy intervention affects macro outcomes.
There are great arguments about how effective a policy lever is.
We need to examine the inner workings of the macro economy to determine which views of economic performance are valid.
Figure 8.4 tells us that macro outcomes depend on certain forces.
The forces of supply and demand are seen by economists when they look at the mechanics of the economy.
The outcomes depicted in Figure 8.4 are the result of market transactions.
Calculating the inner workings of the macro economy in supply and demand terms has been developed by economists.
The total put is the amount of output that all people are willing and able to buy in a given period.
People enter the product market with their incomes in hand.
The downward slope of the aggregate demand curve can be attributed to real-balances, foreign-trade, and interest-rate effects.
We need to know something about prices to answer this question.
People will be able to buy more if goods and services are cheap.
The ability to purchase goods and services will be limited by high prices.
The relationship between average prices and real spending is shown in Figure 8.5.
The axis shows the different quantities of output that might be purchased.
There are price levels shown on the vertical axis.
The aggregate demand curve shows how the real value of purchases varies with prices.
The downward slope of the aggregate demand curve shows that people will buy more goods and services at lower prices if they have a constant level of income.
The most obvious explanation for the downward slope of the aggregate demand curve is that cheaper prices make dollars more valuable.
You have $1,000 in your savings account.
That is dependent on the price level.
You could buy $1,000 worth of output at current prices.
The real value of money is determined by how many goods and services a dollar buys.
If inflation increases by 25 percent, the price level will go up.
Inflation has wiped out a portion of your purchasing power.
You can't buy as many goods and services at the end of the year as you can at the beginning.
There will be a decrease in the quantity of output you demand.
The aggregate demand curve would be shown in Figure 8.5.
The opposite effect of a declining price level is deflation.
When the price level falls, the cash balances in your pocket, bank account, and under your pillow are worth more.
The purchasing power of other dollar-denominated assets is increased by lower price levels.
When the price level falls, bonds rise in value.
Consumers may be tempted to sell bonds and buy more goods and services.
Consumers might save less and spend more of their income if they have more real wealth.
The amount of goods and services demanded at any income level will increase.
The downward-sloping aggregate demand curve is created by the inverse relationship between the price level and the real value of output demanded.
Changes in imports and exports reinforce the downward slope of the aggregate demand curve.
Consumers can buy either domestic or foreign goods.
The relative price is the most important factor in choosing between them.
Americans may buy more imported goods and less domestically produced products if the average price of U.S.-produced goods increases.
Consumers may buy more "Made in the USA" output and less imports if price levels in the United States fall.
International consumers are influenced by price levels.
Overseas tourists flock to Disney World when U.S. prices decline.
Global consumers purchase more U.S. products.
The downward slope of the aggregate demand curve is caused by the changes in import and export flows.