Macroeconomics

p Macroeconomics Homework

Faisal Alshalan

School XXXXXX

Professor XXXXXX

Econ 220 , Spring 2008

Macroeconomics Homework

The United States (US ) experienced a recession in 2001 . Its real GDP growth rate dropped to 0 .3 (see Table 1 . The private domestic investment (made up of plant and equipment and new house investments collapsed recording a negative real growth of 10 .7 , growth in real personal consumption slowed down , real trade deficits worsened , prices of domestically produced goods shoot up , and unemployment rate stood at 4 .8

The US government

adopted expansionary programs and measures to bring the economy back to its normal track . On the part of the US Central Bank (Federal Reserve [Fed] , it lowered the average discount rate charged to banks for short-term credit from 3 .40 in 2001 to 1 .17 in 2002 (see Table 2 ) - the seasonal credit and adjustment credit interest rates were reduced in 2002 from the 2001 levels . This was aimed at encouraging banks to borrow more from the Fed , thereby increasing the amount of money supply and credit available to business investors and consumers at reasonable lending rates . Increased credit access would raise consumer and business spending that would consequently boost employment level lower the rate of price increases , and stimulate the slowing US economy

The significant cut of the average discount rate by 65 .6 in 2002 increased the money supply (M1 ) from 1 ,181 .9 billion in 2001 to 1 ,219 .7 in 2002 . This has consequently increased the real private domestic investment from a negative growth in 2001 to a 1 -real growth in 2002 . This could be attributed to increased housing constructions induced by lower housing loan rate , and increased demand for commercial and industrial loans . These increased demand , in turn , have lowered the price increases of domestically produced goods at 1 .1 in 2002 and improved the real GDP level - growth rate registered at 2 .4 in 2002 from only 0 .3 in 2001

However , the M1 rate of increase in 2002 of 3 .2 might not be enough to spur more private domestic investment as the latter only grew at 1 in 2002 - a growth level , which is less than the percentage increase in the money supply and less than the percentage reduction in the discount rate . The induced private investment was not enough to absorb the unemployed persons in the economy as unemployment rate has even increased from 4 .8 in 2001 to 5 .8 in 2002 - the unemployment rates based on gender and race also increased . However , with the lagging effect of lowering the discount rate , its economic effects , particularly effects on private domestic investments , could be observed in 2003

Table 1 . Real US Gross Domestic Product by Expenditure , Implicit Price Deflators , and Unemployment Rates

2000 2001 2002 2001 2002

Gross Domestic Product by Expenditure billion , 100 1996 ) Annual Change

Gross Domestic Product 9 ,191 .4 9 ,214 .5 9 ,439 .9 0 .3 2 .4

Personal Consumption 6 ,223 .9 6 ,377 .2 6 ,576...