The_Course_of_the_Cycle.ipynb

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   "source": [
    "# The Course of the Cycle"
   ]
  },
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    "## <font color=\"000088\">National Income and Components</font>\n",
    "\n",
    "**Real GDP**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fa5e71970d-pi\" alt=\"Real GDP\" title=\"Real_GDP.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Real GDP per Worker**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fa624b970d-pi\" alt=\"Real GDP per Worker\" title=\"Real_Gross_Domestic_Product___FRED___St__Louis_Fed.png\" border=\"0\" width=\"600\" /> \n",
    "\n",
    "**Investment as a Share of Potential GDP**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b7c9571d00970b-pi\" alt=\"Investment as a Share of Potential GDP\" title=\"Gross_Private_Domestic_Investment___FRED___St__Louis_Fed.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Consumption as a Share of Potential GDP**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b8d2e16931970c-pi\" alt=\"Consumption as a Share of Potential GDP\" title=\"Consumption_as_a_Share_of_Potential_GDP.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Gross Exports as a Share of Potential GDP**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fa626c970d-pi\" alt=\"Gross Exports as a Share of Potential GDP\" title=\"Gross_Exports_as_a_Share_of_Potential_GDP.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Imports as a Share of Potential GDP**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b7c9571b68970b-pi\" alt=\"Gross Imports as a Share of Potential GDP\" title=\"Gross_Imports_as_a_Share_of_Potential_GDP.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Net Exports as a Share of Potential GDP**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b8d2e16752970c-pi\" alt=\"Net Exports as a Share of Potential GDP\" title=\"Net_Exports__as_a_Share_of_Potential_GDP.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;"
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    "## <font color=\"000088\">Monetary</font>\n",
    "\n",
    "**Price Level**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fa6155970d-pi\" alt=\"Price Level\" title=\"Price_Level.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Inflation Rate**:   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b8d2e167e8970c-pi\" alt=\"Inflation Rate\" title=\"Inflation_Rate.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;"
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    "## <font color=\"000088\">Interest and Exchange Rates</font>\n",
    "\n",
    "**Nominal Short-Term Safe Rate**:    \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fa61a3970d-pi\" alt=\"Short Term Safe Nominal Interest Rate\" title=\"Short-Term_Safe_Nominal_Interest_Rate.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Long-Term Real Safe Rate**:    \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b7c9571c5b970b-pi\" alt=\"Long Term Real Risky Interest Rate\" title=\"Long-Term_Real_Risky_Interest_Rate.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Long-Term Risky Real Rate**:     \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401b7c957415e970b-pi\" alt=\"Long Term Risky Real Rate\" title=\"Long-Term_Risky_Real_Rate.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "**Real Exchange Rate** (Value of Foreign Goods/Currency):   \n",
    "<img src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fa61da970d-pi\" alt=\"Real Exchange Rate Value of Foreign Currency Goods\" title=\"Real_Exchange_Rate__Value_of_Foreign_Currency_Goods_.png\" border=\"0\" width=\"600\" /> \n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;"
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    "## <font color=\"000088\">The Output Gap</font>\n",
    "\n",
    "<img style=\"display:block; margin-left:auto; margin-right:auto;\" src=\"http://delong.typepad.com/.a/6a00e551f08003883401bb09fbb872970d-pi\" alt=\"The Output Gap\" title=\"The_Output_Gap.png\" border=\"0\" width=\"600\" />\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;"
   ]
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    "<img src=\"https://tinyurl.com/20181029a-delong\" width=\"300\" style=\"float:right\" />\n",
    "\n",
    "## Catch Our Breath\n",
    "\n",
    "* Ask me two questions…\n",
    "* Make two comments…\n",
    "* Further reading…\n",
    "\n",
    "<br clear=\"all\" />\n",
    "\n",
    "----\n",
    "\n",
    "Lecture Support: <http://nbviewer.jupyter.org/github/braddelong/LSF18E101B/blob/master/The_Course_of_the_Cycle.ipynb>   \n",
    "The Course of the Cycle: <https://www.icloud.com/keynote/0ES05SbDHmKarvpJcJdKgfXng>\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "----"
   ]
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    "## <font color=\"000088\">The Medium Run Cometh</font>\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;"
   ]
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    "### Notes on Figures\n",
    "\n",
    "Real GDP\n",
    "\n",
    "* Real GDP: labor productivity times employment\n",
    "* The principal aspect of this graph is long-run growth: the American economy today is eight times the size of the economy of 1950\n",
    "    * 2.5 times as many workers\n",
    "    * 3.1 times output per worker\n",
    "* The secondary aspect is the business cycle\n",
    "* The tertiary aspect is speedup and slowdown in the growth trend\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Real GDP per Worker\n",
    "\n",
    "* Real GDP per worker (in 2009 dollars) was $45,000 per year in 1950 and is $115,000 today\n",
    "* Note the productivity growth speedup of the mid-1990s\n",
    "* And note the productivity growth collapse since 2000\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Investment Spending as a Share of Potential GDP\n",
    "\n",
    "* The major driver of the business cycle is fluctuating investment spending\n",
    "* This is investment spending as a share of potential GDP\n",
    "* In our simple macro model, I/Y&star; \n",
    "* These waves are the business cycles\n",
    "* Note the anemic investment recovery of 2009-present\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Personal Consumption Expenditures as a Share of Potential GDP\n",
    "\n",
    "* In the language of our simple macro model, this is C/Y&star;\n",
    "* When Y is low relative to Y&star;, C/&star; is low as well\n",
    "* C/Y&star; was low in the business cycle troughs of 2009, 1992, 1982, 1975, 1970, 1960, etc.\n",
    "* The medium-term rise in C/Y&star; as the U.S. becomes a save-and-invest-less country\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Gross Exports\n",
    "\n",
    "* Demand for U.S. exports has risen massively since 1950: from 5% to 13% of national income and product\n",
    "* When the value of foreign currency/bonds is high, exports boom\n",
    "* When the value of foreign currency/goods is low, exports are depressed\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Gross Imports\n",
    "\n",
    "* Imports have risen from 4% to 16% of national income and product since 1950\n",
    "* “Globalization” and “hyperglobalization”\n",
    "    * The coming of the container ship\n",
    "    * The tripling of world oil prices in the 1970s a big moment\n",
    "    * As is the great expansion of world trade with the coming of the internet\n",
    "        * Value chains\n",
    "        * The China shock\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "The Trade Balance\n",
    "\n",
    "* Net exports are a balancing item: you have to add them to C+I+G to get total spending on domestically-produced goods\n",
    "* The high interest rates of the 1980s that drove the value of foreign currency up led to a large negative swing in net exports\n",
    "* So did the optimism about America of the dot-com boom, and the so-called “strong dollar policy”\n",
    "* Most of all, however, the medium-term shift in the trade balance is due to the savings shortfall\n",
    "    * Largely induced by large government deficits\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Short-Term Safe Nominal Interest Rate: Treasury Bills\n",
    "\n",
    "* The interest rate the Federal Reserve can nail: the short-term safe nominal interest rate\n",
    "* Note the regular cycles as the Federal Reserve tries to “lean against the wind”\n",
    "* Note the impact of the inflationary wave of the 1970s on the Treasury bill rate the Fed thought was appropriate\n",
    "* Note the extended time at the zero lower bound in the 2010s\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Long-Term Safe Real Interest Rate\n",
    "\n",
    "* Subtract the current inflation rate and add on the term premium—the difference between the 3-mo. T-bill and the 10-yr. T-bond rate—and get what current and expected future Federal Reserve policy have on incentives for investment\n",
    "* Note the:\n",
    "    * Substantial tightening of the early 1970s\n",
    "    * Loosening of the mid 1960s\n",
    "    * Volcker disinflation of the early 1980s\n",
    "    * The Greenspan preemption of the mid 1990s\n",
    "    * The great easing of policy at the end of the 2000s\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Long-Term Risky Real Interest Rate\n",
    "\n",
    "* But the interest rate that actually matters for the determination of investment is the long-term real risky interest rate\n",
    "* The safe rate plus the risk premium assigned by financial markets\n",
    "* See the sharp tightenings coming from Federal Reserve policy and the financial system in:\n",
    "    * the late 2000s, \n",
    "    * the early 1980s, and\n",
    "    * the early 1970s\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Real Exchange Rate\n",
    "\n",
    "* Dollar pegged to other currencies under the Bretton Woods system until the early 1970s\n",
    "* Since then, three major dollar cycles\n",
    "* Exports drop (and manufacturing hammered) when the value of foreign currency/goods falls\n",
    "    * Reagan deficits\n",
    "    * Internet/China\n",
    "    * “Taper tantrum”\n",
    "    * Trumpenomics\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Price Level\n",
    "\n",
    "* Headline and core\n",
    "* Cumulative and compounded 7.5-fold inflation since 1950\n",
    "    * Consumer prices today 2.5 times what they were in 1984\n",
    "    * Consumer prices in 1950 1/3 what they were in 1984\n",
    "* 2.5% per year\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "Inflation Rate\n",
    "\n",
    "* Consumer Price Index\n",
    "    * Not PCE…\n",
    "* “Headline” and “core”\n",
    "    * Current core a better forecast of future headline than current headline is\n",
    "* Korean War \n",
    "* Mid-50s to late 60s\n",
    "* The 70s inflation\n",
    "* “Opportunistic” disinflation\n",
    "* The era of the zero lower bound"
   ]
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    "# 6 "
   ]
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    "# <font color=\"880000\">To Your iClickers...</font>\n",
    "\n",
    "(A) The primary reason we are making the flexprice assumption right now is:\n",
    "\n",
    "1. While it is not good for analysis for today, for next year, or even for the next three years, it is almost invariably the case that the effects of all disturbances on the unemployment rate and the level of production relative to potential die out within five years, so it is a good medium-run analysis.\n",
    "2. We want to distract attention from market failures lest people begin agitating for socialism\n",
    "3. It serves as a useful benchmark—what would happen if the macroeconomy were functioning efficiently\n",
    "4. It rests on Say’s Law—the economic principal that supply creates its own demand. And even though Say’s Law is a false theory, the Federal Reserve is skillful and does a good job of making it true in practice almost always. (_This might be a good answer if not for the “almost always” at the end—it would have to be “most of the time” or “much of the time” or “some of the time”_.)\n",
    "5. None of the above/not enough information\n",
    "\n",
    "----\n",
    "    \n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">S = I</font>\n",
    "\n",
    "The easiest way to solve the flexprice model is through examining the flow-of-funds through financial markets because:\n",
    "\n",
    "1. the savings equation is simpler than the consumption function, which we would have to use if we were to solve the flexprice model using the national income identity C + I + G + NX = Y\n",
    "2. the price of what is traded in financial markets is the real interest rate r, and r is the thing that moves to ensure that disturbances to one component of spending do not push the economy out of its flexprice full-employment equilibrium\n",
    "3. it allows us to easily incorporate international trade and finance, and it is long past time that we stopped pretending that the United States was a closed economy in macroeconomics\n",
    "4. it is most important to link the medium-run flexprice model to the long-run Solow growth model, and so we focus on the determinants of investment\n",
    "5. none of the above/not enough information"
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    "# <font color=\"880000\">To Your iClickers...</font>\n",
    "\n",
    "(A) The primary reason we are making the sticky price-wages-debt assumption right now is:\n",
    "\n",
    "1. We are sure that it corresponds to reality\n",
    "2. There is a lot of evidence that prices, wages, and debt are sticky, and that in the short run it is aggregate demand that determines the level of national income and product.\n",
    "3. It is the simplest way to break the flexprice model conclusion that national income and product must always be close to potential output, and we know that conclusion must be broken in any good model.\n",
    "4. It is a legacy left behind from the economics of the 1940s that ought to be dropped.\n",
    "5. None of the above/not enough information\n",
    "\n",
    "----\n",
    "    \n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">(B) When We Made the Flexprice Assumption…</font>\n",
    "\n",
    "…it was because:\n",
    "\n",
    "1. While it is not good for analysis for today, for next year, or even for the next three years, it is almost invariably the case that the effects of all disturbances on the unemployment rate and the level of production relative to potential die out within five years, so it is a good medium-run analysis.\n",
    "2. We want to distract attention from market failures lest people begin agitating for socialism\n",
    "3. It serves as a useful benchmark—what would happen if the macroeconomy were functioning efficiently\n",
    "4. It rests on Say’s Law—the economic principal that supply creates its own demand. And even though Say’s Law is a false theory, the Federal Reserve is skillful and does a good job of making it true in practice almost always.\n",
    "5. None of the above/not enough information\n",
    "\n",
    "----\n",
    "    \n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">(C) In the Flexprice Model…</font>\n",
    "\n",
    "…suppose foreign exchange speculators become more pessimistic about the dollar so that the parameter ε<sub>o</sub> goes up by an amount Δε<sub>o</sub>. The relevant pieces of the flexprice model are:\n",
    "\n",
    "&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;\n",
    "$ {\\Delta}{\\epsilon} = {\\Delta}{\\epsilon}_o - {\\epsilon}_r\\left({\\Delta}r\\right)  $\n",
    "\n",
    "&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;\n",
    "$ {\\Delta}I =  - I_r\\left({\\Delta}r\\right)  $\n",
    "\n",
    "&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;\n",
    "$ {\\Delta}NX = - x_{\\epsilon}{\\epsilon}_r\\left({\\Delta}r\\right)  $\n",
    "\n",
    "This increased pessimism leads:\n",
    "\n",
    "1. investment spending to go up and net exports to go up\n",
    "2. investment spending to go up and net exports to go down\n",
    "3. investment spending to go down and net exports to go up\n",
    "4. investment spending to go down and net exports to go down\n",
    "5. none of the above/not enough information\n",
    "\n",
    "----\n",
    "    \n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">(D) In the Sticky-Price Model…</font>\n",
    "\n",
    "…an increase in consumer confidence co leads to:\n",
    "\n",
    "1. an increase in Y, an increase in C, and no change in NX and I\n",
    "2. an increase in Y, an increase in C, and reductions in NX and I\n",
    "3. no increase in Y, an increase in C, and a fall in NX and I.\n",
    "4. no increase in Y, an increase in C, a fall in I, and no change in NX\n",
    "5. none of the above/not enough information\n",
    "\n",
    "----\n",
    "    \n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">(E) In the Sticky-Price Model…</font>\n",
    "\n",
    "…an increase in the marginal propensity to consume cy leads to:\n",
    "\n",
    "an increase in the multiplier μ\n",
    "a decrease in the multiplier μ\n",
    "no change in the multiplier μ\n",
    "not enough information to tell…\n",
    "\n",
    "----\n",
    "    \n",
    "&nbsp;"
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    "# <font color=\"880000\">To Your iClickers...</font>\n",
    "\n",
    "We study business cycles because:\n",
    "\n",
    "1. They almost invariably have decisive influence on the long run trend of economic growth\n",
    "2. A five percent rise or fall in production and a two percent fall or rise in the unemployment rate is a bigger deal in the short run in which we live than most other things affecting the economy\n",
    "3. They pose a great intellectual puzzle\n",
    "4. They demonstrate the optimality of a market economy\n",
    "5. None of the above/not enough information\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">In the Real World…</font>\n",
    "\n",
    "…to the extent that production and national income are equal to potential output, it is primarily because…\n",
    "\n",
    "1. …the real interest rate adjusts to balance demand among the broad categories of spending: C, I, G, GX, and IM\n",
    "2. …clever monetary and fiscal policy make Say’s Law—the idea that supply creates its own demand, that the act of setting production in motion automatically creates enough income to purchase an equivalent amount of production elsewhere in the economy\n",
    "3. …the nominal price level P adjusts—with inflation if aggregate demand is too high and deflation if aggregate demand is too low—to match nominal spending to actual production\n",
    "4. …the real wage W/P adjusts so that supply and demand balance in the labor market and so, minor frictional and structural unemployment aside, everyone who wants a job gets to work\n",
    "5. None of the above/not enough information\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">In the Flexprice Medium-Run Model…</font>\n",
    "\n",
    "…we would expect that a cut in tax rates would lead to…\n",
    "\n",
    "1. ...no change in Y, an increase in C, an increase in r, and a decrease in G, I, and NX\n",
    "2. ...no change in Y, no change in G, an increase in C, an decrease in r, and an increase in I and NX\n",
    "3. ...no change in Y, no change in G, an increase in C, an increase in r, and a decrease in I and NX\n",
    "4. ...no change in Y, no change in G, an increase in C, and a decrease in r, I, and NX\n",
    "5. ...None of the above/not enough information\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;\n",
    "\n",
    "## <font color=\"000088\">In the Flexprice Medium-Run Model…</font>\n",
    "\n",
    "…when you solve it you frequently find terms like (I<sub>r</sub> + x<sub>ε</sub>ε<sub>r</sub>) appearing in your calculations because…\n",
    "\n",
    "1. …it is the change in foreign savings that appears in response to a one unit increase in investment demand\n",
    "2. …it is the amount by which a gap between investment and savings in the flow-of-funds is decreased by a one-unit increase in the real interest rate r\n",
    "3. …it determines the value of the multiplier in a flexible price economy\n",
    "4. …it determines the increase or the decrease in the real wage necessary in order to keep actual national income and product Y equal to potential output Y*\n",
    "5. ...None of the above/not enough information\n",
    "\n",
    "----\n",
    "\n",
    "&nbsp;"
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