Max Louis Isabelle

Econ 104H
Rohit Lamba
Problem Set#1
1)
Nominal GDP- Is the GDP that is raw and is taking nothing into account
except for total production. This value tends to be higher than real
GDP since inflation tends to rise annually.

Real GDP- This measure of GDP measures the value of production by

comparing it to a base year. To calculate Real GDP the GDP deflator for
the base year is divided by the GDP deflator of the current year. That
ratio is then multiplied by the current year nominal GDP. This value
represents current GDP in terms of price level of the base year.

GDP deflator- Is a value that is calculated that converts output

measured at current prices into a base dollar value. By calculating the
GDP deflator it can be shown how much of the change in GDP from
year to year is caused by changes in the price level and not actually
production increase. The GDP Deflator value is

Inflation- Is the change is the value of money between two periods of

time. Often times based of the change in price index.

2)
Procyclical- Is when a positive correlation exist between real GDP and
some variable. In other words when Real GDP goes up that variable
also goes up, and when real GDP goes down that variable goes down.
When a variable moves cyclically in the same direction as real GDP.

Example variables:
-Employment
-Broad private investment
-Consumer Spending
-GDP
-Consumer Goods

3)
The Great depression when looked at in hindsight is still
somewhat of mystery in terms of what went wrong. There are many
popular theories of what happened though. At the heart of it all is
there was a drastic reduction in aggregate demand in the United
States economy that had many repercussions. This reduction in
demand caused the GDP to fall and the autonomous level of spending
to fall as people looked toward a poor financial future. These events

continued to multiple one another as the economy sank to a low point

and people emotions took hold of their decision.
Y(GDP or production) = C(consumption) + I (investment) + G (Gov
spending) + X(exports)- M(Imports)
The above equation examines the different factors that affect the
production in an economy. All of these factors played a role in the
great depression.
The fall in demand that started the downward cycle of the United
States economy started with the stock market crash. People had been
viewing stocks as guaranteed income and where planning accordingly.
When the stock crashed people savings took a hit. This was the first
event that caused demand to fall.
Disposable Income (Yd )= Consumption + Savings
The hit that the stock market took on the savings of the population of
the US reduced disposable income immediately, which reduced
demand. But the stock market crash went beyond this.
People started fearing that banks and markets were not a good
place for there money. Everyone started pulling out there money from
banks which intern pulled capital out of the US economy. The sudden
withdraw of saving from banks ended with banks going bankrupt, as
they to had lost money in the stock market crash. This event took
another hit at the disposable income of household as many not only

had there saving reduced form the stock market crash, but also had
them completely wiped out as a result of bank going bankrupt.
The bankruptcy of the banking system in the US could have ben
avoided if two things happened. The Government stepped in or people
did not succumb to fear and would leave there capital in the markets.
The government can not be blamed for this event entirely though.
Government did not posses experience for regulating a crisis time
economy, and no real information was out on what exactly to do. In
hindsight the government should have adopted fiscal policy that
increased demand by increasing the autonomous level of spending (E0)
of households in the US(shown in Graph 1).
G = E 0 = Y

T = E0 = Y

By the government increasing spending it would be able to infuse the

US economy with capital, that was lost when the stock market crashed,
followed by the banking crisis. This action would lead to an increase in
the autonomous level of spending and an increase in the production of
the US, since people will have some disposable income demand would
increase. The other action is to reduce tax, which would have
increased the autonomous level of spending, which once again
increased demand, which increased production. These two simple
actions would have been able to reverse the downward spiral the
economy was in. The only problem is the government did not know
this, nobody did.

It turns out what brought the United States out of the great
depression was an influx in government spending in the private sector
though infrastructure improvement and eventually weapons and
supplies to fuel WWII. This funding could have come sooner but that is
why lesson are learned.
Y(GDP or production) = C(consumption) + I (investment) + G (Gov
spending) + X(exports)- M(Imports)
The above equation examines the different factors that affect the
production in an economy. All of these factors played a role in the
cause of the great depression. To begin a reduction in Investment (I)
though the stock markets crash and bank crisis. Which resulted in a
decrease in consumption (C). Then the eventual saving grace was
Government spending (G) which could have helped turn the tide of the
great depression earlier.

4)
Liquidity- how fast an asset can be bought or sold without affecting its
price, leads to a high volume of activity in the market. Also it is the
companys ability to meet it s short-term obligations.

Eurozone- a group of European countries whose national currency is

the Euro.

Continuity bias- the tendency to perceive that the future will

resemble the past.

Solvent- is the ability of a company to meet it long-term financial

obligation.

Fiscal Consolidation- policy that is aimed at reducing government

deficits and debt accumulation.

Fiscal Space- the flexibility of a government in its spending choices,

and, more generally, to the financial well-being of a government.

Quantitative Easing- the introduction of new money into the money

supply by the central bank (Federal Reserve in the US).

Summary:
In the lecture by Barry Eichengreen on his book Hall of Mirros the
lecture talks about the great depression and great recession. These
two events are considered the most historical significant events in the
history of macroeconomics, which is what Barry specializes in. The
lecture compares causes and reaction to both of the crisis.
The great depression came at a time when in the united states,
and across the world government and industry had no experience of
dealing with a crisis of this sorts. The action by both entities had no
precedent because there was none. So when banks started to fail, the
government stood by and did nothing. This resulted in the failure of

thousands of banks. The Government had no idea how these banking

failures would impact the economy. Fortunately when the great
recession rolled around the Government understood how important
banks solvency was, so when banks began to fail they were bailed out
with the except of Lehman brothers.
Also the United States and European countries quickly adopted a
trillion dollar stimulus plan to keep the world economy afloat.
Government increased public spending which managed to stimulate
the economy to give time to the banks to fix themselves. This action
was a direct result of studying the policy failure during the great
depression. During the great depression government reduced public
spending and left banks to fail. This resulted in an event that reduced
aggregate demand and available income. Causing production to fall
and the economy to sink out of control.
While the world government did enough in 2008 to stop a great
depression from happening, that is where they stopped their
intervention. No aggressive recovery policy was adopted which is why
it is believed the world economy has been in a relatively slow growth
period since 2008. This policy failure to help recovery in the great
recession was due to a lack of experience in this area, similarly to how
in the great depression the government did not know to increase
spending and save banks.

Important lesson were learned from both of these events that will
shape macroeconomics in years to come. As the policy that helped
stabilize the economy of the great recession was derived from
experience of policy failure during the great depression. In future crisis
period the government will have learned from both crisis, and will be
able to adequately stabilize the crisis economy, while also being able
to stimulate and help facilitate the post crisis economy, which will
expedite the world economy return to normalcy.