As we've covered previously, the aggregate-demand aggregate-supply model is a useful tool for helping us understand what's going on in an economy. But it can get pretty complicated. In this video, we're going to take a look at the following real-world...
Effective fiscal policy has to be timely, targeted, and temporary. But how the central bank, businesses, and consumers respond to fiscal policy also plays a role in how effective it is. When expansionary fiscal policy is enacted, what happens to the...
In the early 2000s, Argentina’s debt reached 150% of GDP, leading to what was the largest government default in the history of the world. But Argentina is not alone. Other countries before and since have also defaulted on their debts: Thailand, Indonesia...
In this video, we explore when and why the government might engage in expansionary fiscal policy. Specifically, we’ll discuss why the government might increase spending, or decrease taxes, to combat a recession. Think about an economy during a recession...
The best case for fiscal policy happens during a recession caused by an aggregate demand shock. Even so, it’s hard to get it right because the U.S. economy is massive and complex. An ideal stimulus is: 1. Timely 2. Targeted 3. Temporary All of these...
We’re going to explore the mechanics of the aggregate-demand aggregate-supply (AD-AS) model. In our example, we’ll measure the economy’s inflation rate as well as the real GDP growth rate on the vertical and horizontal axes. A country’s normal GDP growth...
What is fiscal policy? Very simply, it’s a government’s policies on taxes, spending, and borrowing. But how it’s practiced is a little more complicated. Fiscal policy can be used in an effort to mitigate fluctuations in the business cycle – to soften the...
Ideas are a major factor in economic growth. But so are saving and investing. If you were given the choice between living in an inventive (more ideas) or a thrifty (more savings) country, which would you choose? The Solow model of economic growth, which...
In Intro to the Bond Market, you learned the basics about bonds and how they differ from stocks. But what if you’re investing and you’ve got a few possible companies to choose from? How would you evaluate which bond is likely to be the best investment...
In last week’s Principles of Macroeconomics video, you learned about the steady state level of capital and the Solow model of economic growth. Here are two of the practice questions from that video: Country A has K=10,000 and produces GDP according to...
If you think through all of the variables that shape a country’s economy, it’s no wonder that monetary policy is difficult. It should also come as no surprise that the Federal Reserve doesn’t always get it right. In fact, sometimes the Fed’s actions have...
As we’ve seen, it can be difficult for the Federal Reserve to course-correct when dealing with a sluggish economy suffering from an aggregate demand shock. Now we’re going to see what happens when a negative real shock hits. For instance, suppose we see...
Imagine that you’re the Fed and monetary policy is your domain. The economy has been doing fine: inflation isn’t too high, GDP is growing at a reasonable rate. But then something happens. Consumer confidence drops. The economy shrinks. What do you do?...
If you heard a rumor that your bank was insolvent (in other words, it had more liabilities than assets), what would you do? A typical reaction is to panic. What if you can’t get your money out? Your next step would likely be to try and get all of your...
In response to the 2008 financial crisis, the Fed employed some new instruments and approaches to getting the economy back on track. In this video we explore three of these: quantitative easing, paying interest on reserves, and conducting repurchase (and...
In the United States, the Federal Reserve controls the supply of money. This makes it a pretty massive player in the US – and world – economy. The Fed can use the money supply and interest as tools to influence aggregate demand. But how the Fed does this...
When you deposit money into a bank, do you know what happens to it? It doesn’t simply sit there. Banks are actually allowed to loan out up to 90% of their deposits. For every $10 that you deposit, only $1 is required to stay put. This practice is known...
What is money? That may seem like a really simple question, but it’s actually kind of complicated. Paper bills and coins, or currency, is obviously money. But it doesn’t end there. Technically, “money” is anything that is a widely accepted means of...
Inflation can throw a kink in your savings plans. To accurately know your rate of return, you need to do a little more than calculate what you’ll receive off of the nominal interest rate. First off, returns on savings are taxed. Depending on where you...
Imagine that we’re in the late 1920s in the United States. Times are great. World War I is behind us and we’re in the early days of the “Golden Age of Hollywood.” Jazz music is blossoming. Automobiles are new and novel. As Art Deco style peaks, there’s...