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Short History of U.S. Economy
History of the U.S. Economy
Prior to and including the Great Depression
• Contractions were often accompanied by a falling
price level
Keynesian Period (Demand-side economics)
• Era of generally strong economic growth
• Moderate increases in the price level
Early 1970s to the early 1980s (stagflation)
• High unemployment and high inflation
Since the early 1980s (Supply-side economics)
• Steady economic growth
• Moderate increases in the price level
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Great Depression and Before
Why did aggregate demand decline so much
during this period?
Stock market crash of 1929
Grim business expectations
Drop in consumer spending
Widespread bank failures
Severe restrictions on world trade
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Adam Smith
1723-1790
Classical
vs.
Keynesian
John Maynard Keynes
1883-1946 4
Age of Keynes
Employment Act of 1946
Imposed responsibility on the federal government to
foster
• Maximum employment
• Maximum production
• Maximum purchasing power
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The Great Stagflation: 1973 - 1980
Late 1960s aggregate demand rose
Why?
Result?
1971 - Nixon introduced ceilings on prices and wages
OPEC reduced supply of oil
Result?
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The Great Stagflation
1970s - Reduced aggregate supply
Era of Stagflation
Stagnation, or a contraction in the economy’s
aggregate output combined with
Inflation, a rise in the economy’s price level
Primarily a supply-side problem
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Experience Since 1980
1980s - Supply-side economics
The federal government, by lowering tax rates,
would
1. Increase after-tax earnings
2. Provide incentives to increase the supply of labor
and other resources
Resulting increase in aggregate supply would achieve
the goals of expanding real GDP and reducing the price
level
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Experience Since 1980
In 1981 President Reagan and Congress cut
personal income tax rates
Recession hit in 1982 and the
unemployment rate shot up to 10%
After the recession of 1987, the economy
began the longest peacetime expansion on
record
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Experience Since 1980
Growth in federal spending exceeded the
growth in tax revenues  federal budget
deficits swelled
Accumulated deficits =
Government debt
• http://www.usdebtclock.org/
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Experience Since 1980
How can the government gain
control over deficit spending?
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