[MACROECONOMICS

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United States 2001 recession and policy measures using the ISLM model.

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Group II

PGP/14/260 NITESH KUMAR GUPTA PGP/14/280 MAHTAAB KAJLA PGP/14/287 PRACH CHAWLA PGP/14/290 RAHUL MITTAL PGP/14/303 SHRUTI KABDAL PGP/14/313 VINNY ARYA PGP/14/315 VISHAD DUBEY

AGENDA
Recession - defined The US 2001 recession Understanding the IS - LM Model Application of the model – Fiscal and Monetary Policy Measures
Recession

US 2001 recession

Fiscal & Monetary Policy measures

IS - LM Model understanding

© Group II | Indian Institute of Management, Kozhikode | Macroeconomics

Recession Defined
In macroeconomics, a recession is a decline in a country’s gross domestic product(GDP), or negative real economic growth, for two or more successive quarters of a year

© Group II | Indian Institute of Management, Kozhikode | Macroeconomics

Current Contribution of US

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Kozhikode | Macroeconomics .History Dec ths ‘09 mon un 19 – J ‘07 Mar hs ‘01 ont ov 8 m – N ‘01 Jul hs ‘91 ont ar 8 m – M ‘90 l ota ‘82 s t ov ear – N 2 y ‘80 Jul © Group II | Indian Institute of Management.

Kozhikode | Macroeconomics .History © Group II | Indian Institute of Management.

occurs when the value of a currency changes quickly.payments crisis . Kozhikode | Macroeconomics . •It is a type of financial crisis and often associated with a real economic crisis.Causes of Recessions Currency Crisis •A currency crisis. which is also called a balance of . undermining its ability to serve as a medium of exchange or a store of value. •Asian crisis of 1997 © Group II | Indian Institute of Management.

electricity shortage or electricity crisis •1973 oil crisis © Group II | Indian Institute of Management. It usually refers to the shortage of oil and additionally to electricity or other natural resources. energy shortage . Kozhikode | Macroeconomics . is any great bottleneck in the supply of energy resources to economy. petroleum crisis .Causes of Recessions Energy Crisis •An energy crisis. •An energy crisis may be referred to as an oil crisis .

•Subprime crisis of 2007 • © Group II | Indian Institute of Management.Causes of Recessions Financial Crisis •The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. Kozhikode | Macroeconomics .

Causes of Recessions Overproduction •In economics. overproduction refers to excess of supply over demand of products being offered to the market. Kozhikode | Macroeconomics . •This leads to lower prices and/or unsold goods •Canadian crisis of 1920s © Group II | Indian Institute of Management.

Kozhikode | Macroeconomics . recessions and stagnation arise due to inadequate consumer demand relative to the amount produced •1930s US crisis © Group II | Indian Institute of Management.Causes of Recessions Under consumption •In under consumption .

THE to it?? BUBBLE What led DOT COM NASDAQ COMPOSITE INDEX © Group II | Indian Institute of Management..US ECONOMIC RECESSION 2001 Y2K SCARE!. Kozhikode | Macroeconomics ..

THE DOT COM BUBBLE Steep rise in the stock market in 2000 followed by a steep decline leading to a recessionary impact High interest rate by the Federal Reserve limiting liquidity available for investments and procuring cheap business loans and mortgages © Group II | Indian Institute of Management..US ECONOMIC RECESSION 2001 Y2K SCARE!. Kozhikode | Macroeconomics ..

Kozhikode | Macroeconomics .US ECONOMIC RECESSION 2001 High Deflationary Impact leading to decline in Investments © Group II | Indian Institute of Management.

US ECONOMIC RECESSION 2001 CORPORATEto it?? What led SCANDALS •The company which was No 7 on the Fortune 500’s list worth more than 60 billion $ filed for bankruptcy in December 2001 © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .

Kozhikode | Macroeconomics .US ECONOMIC RECESSION 2001 9/11 What led to it?? © Group II | Indian Institute of Management.

© Group II | Indian Institute of Management. Kozhikode | Macroeconomics .US ECONOMIC RECESSION 2001 NATURAL ENDled to it?? What TO ECONOMIC CYCLE.

US ECONOMIC RECESSION 2001 Impact on the US Economy Source: US Bureau of Economic Analysis © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .

Kozhikode | Macroeconomics .US ECONOMIC RECESSION 2001 Impact on the US Economy Source: US Bureau of Economic Analysis © Group II | Indian Institute of Management.

1mn people lost jobs as unemployment rose from 3. Kozhikode | Macroeconomics un em oy pl m en t H ig h co ns um er The average U.S.8% of de b t .S households have less than $1000 in liquid assets and more than 65% have less than $5000 in liquid assets S- A N © Group II | Indian Institute of Management.9% to 5.US ECONOMIC RECESSION 2001 Pressure on national currency Fo et Lo to r eb w ho us re ig n D eh ol d sa vi ng s U More than 40% of U. household has $8000 in credit card debt H h ig v le s el 2.

The Goods Market •Demand is an increasing function of output •An increase in output leads to an increase in income and also to an increase in disposable income. © Group II | Indian Institute of Management. Kozhikode | Macroeconomics . •An increase in output also leads to an increase in investment.

Kozhikode | Macroeconomics .IS Relation •The higher interest rate ‘i’ implies a lower level of output •The IS curve is downward sloping. •Relation between the interest rate and output is represented by the downward sloping curve © Group II | Indian Institute of Management.

given the interest rate. © Group II | Indian Institute of Management.Shifts of the IS Curve •Increase in taxes shifts the IS curve to the left •Decrease in demand for goods. shift the IS curve to the right. Kozhikode | Macroeconomics . given the interest rate. shift the IS curve to the left •Increase the demand for goods.

•increase in income leads to an increase in the interest rate. Given the money supply. Y. this increase in the demand for money leads to an increase in the equilibrium interest rate.Deriving the LM Curve •An increase in income leads. the real money supply is equal to the real money demand. Kozhikode | Macroeconomics . to an increase in the demand for money. and the interest rate. which depends on real income. at a given interest rate. i © Group II | Indian Institute of Management. •In equilibrium.

•This relation is represented by the upward-sloping LM curve. leads to an increase in the interest rate. © Group II | Indian Institute of Management. •A decrease in the money supply shifts the LM curve up.Shifts of the LM Curve •An increase in the level of income. Kozhikode | Macroeconomics . •An increase in the money supply shifts the LM curve down.

© Group II | Indian Institute of Management. Kozhikode | Macroeconomics . which is on both curves.IS-LM Model •Only at point A. are both goods and financial markets in equilibrium.

Kozhikode | Macroeconomics .IS-LM Model © Group II | Indian Institute of Management.

Kozhikode | Macroeconomics .Fiscal Policy Fiscal Policy changes are effected through: © Group II | Indian Institute of Management.

The IS curve shifts to the right by ΔG (1-MPC) Which raises the interest rate… r2 r1 And the income r LM IS2 IS1 Y1 Y2 Y © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .Fiscal Policy Change in Government Spending crease in government purchases shifts the IS curve to the right.

Fiscal Policy Change in Tax Rates A decrease in tax rates shifts the IS curve to the right The IS curve shifts to the right by r MPC *ΔT (1-MPC) r2 r1 And the income IS2 IS1 Y1 Y2 Y LM Which raises the interest rate… © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .

Fiscal Policy Measures Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .

Fiscal Policy Measures Increased spending © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .

Kozhikode | Macroeconomics .Monetary Policy Monetary policy aims to shorten recessions by encouraging © Group II | Indian Institute of Management.

Kozhikode | Macroeconomics .Monetary Expansion Policy © Group II | Indian Institute of Management.

Kozhikode | Macroeconomics .Monetary Policy Measures © Group II | Indian Institute of Management.

tradingeconomics.Effects of Monetary Policy Source : www. Kozhikode | Macroeconomics .com © Group II | Indian Institute of Management.

from IS’’ to IS’. from LM to LM’ • •The decrease in tax rates and the increase in spending both led to a shift of the IS curve to the right. © Group II | Indian Institute of Management.What happened in 2001 •Decrease in investment demand led to a sharp shift of the IS curve to the left. Kozhikode | Macroeconomics . from IS to IS’’ • •Increase in the money supply led to a downward shift of the LM curve.

tradingeconomics.com/unite d-states/indicators/ •About.com •Macroeconomics.com – US Economy •www. Department of Economics © Group II | Indian Institute of Management.php •http://www. By Olivier Blanchard •Bureau of Economic Analysis •San José State University.tradingeconomics. Kozhikode | Macroeconomics . 4th ed.org/external/datamapper /index.imf.References •Wikipedia – The Online Encyclopedia •http://www.

Q&A © Group II | Indian Institute of Management. Kozhikode | Macroeconomics .

The attacks on our country affected our economy.“The recession started upon my arrival. Bush © Group II | Indian Institute of Management. It could have been— some say February.” George W. Kozhikode | Macroeconomics . My decision on Iraq. affected the economy. it happened as we showed up here. Corporate scandals affected the confidence of people and therefore affected the economy. some speculate maybe earlier it started—but nevertheless. some say March. this kind of march to war.