Macro-Econ

Econ 205 Professor Joel David Fall 2013

Homework 6

The Great Recession In this exercise, you will obtain and summarize data depicting the behavior of an economy during the “Great Recession” of 2008-10. We will use data from the World Bank World Development Indicators database.

1. Download the following data for your country for the years 2000-12: (1) GDP (constant LCU), Consumer Price Index, General Government Final Consumption Expenditure (constant LCU), Gross Fixed Capital Formation (constant LCU), Household Final Consumption Expenditure (constant LCU), and Money and Quasi Money (M2) (current LCU). These will be our series for real GDP, the price level, government spending, investment, consumption, and money supply.

2. Compute the percentage change in each of these series for each year over the period 2000-2007. The percentage change in the CPI is the rate of inflation. What is the annual change in each series over this period? Do the same calculations for 2010-12 and report the average annual changes.

3. Now, do the same for the period 2007-10. Did the economy enter a recession? What makes you think so? Which component of GDP fell the most during this period (or grew more slowly than in the prior period): C, I, or G?

4. Do you think the recession was caused by a fall in Aggregate Demand? Why or why not? Let us assume this is the case. What does our AD-AS model predict should happen to real GDP and inflation? Is this what occurred?

5. Did government spending increase over the 2007-10 period? If so, why do you think the government increased its activity?

6. Did the money supply increase over this period? If so, why do you think the central bank expanded the money supply?

7. How has the economy, i.e., real GDP, performed since 2010? Is it growing faster than during 2000-07? That is, is it returning to its trend, or is it still below?