PRESENTATION

ON

SHIFT IN DEMAND CURVE DUE TO U.S RECESSION OF 2001

BY:www.company.com

BHUMIKA .R. SHARMA

AGGREGATE DEMAND
Aggregate demand planned expenditure for goods and services in the economy. =C+I+G+(X-M) C :consumer expenditure of goods and service. I : gross domestic fixed capital formation. G : general government final consumption. X : export of goods and services. M : import of goods and services.
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SHIFT IN AGGREGATE DEMAND

Reasons: Shift arising from changes in consumption. Shift arising from changes in investment. Shift arising from changes in government. Shift arising from changes in net export. Shift arising from unemployment

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CASE STUDY:

The U.S. recession of 2001

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CASE STUDY: The U.S. recession of 2001 SHIFT IN DEMAND CURVE DUE TO UNEMPLOYMENT
 Unemployment rates rose from 4%(Dec 2000) to 5% (Aug 2001).  Inflation rate at the time was about 2.5%, and in June 2000, there were 11 rate cuts in 2001, and the inflation rate at the end of that year at 1.5%

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Inflation Rate 5.0% 2.5% 1.5% C

A D

4% Dec 2000

5% Aug 2001

Unemployment Rate

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VARIABLES THAT SHIFT THE AGGEGATE DEMAND CURVE

Changes in Government Policies
 Monetary policy : The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.  Fiscal policy : Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth.
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MONETARY AND FISCAL CHANGES

Tax cuts in 2001 and 2003 Federal funds rate fell from 6.5% ( Dec 00) to 1% (June 03). Money growth accelerated and interest rates fell. Stimulated consumer and investment spending.

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Changes in the Expectations of Households and Firms

If households become more optimistic about their future incomes, they are likely to increase their current consumption. (The Interest-Rate Effect)

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a. The lower the price level, the less money households need to buy goods and services. b. When the price level falls, households try to reduce their holdings of money by lending some out (either in financial markets or through financial intermediaries). c. As households try to convert some of their money into interest-bearing assets, the interest rate will drop. d. Lower interest rates encourage borrowing firms to borrow more to invest in new plants and equipment and it encourages households to borrow more to invest in new housing. e. Thus, a lower price level reduces the interest rate, encourages greater spending on investment goods, and therefore increases the quantity of goods and services demanded.
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CHANGES IN NET EXPORT

 If firms and households in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall, and the aggregate demand curve will shift to the left.

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CHANGES IN INVESTMENT

Investor bid up the stock prices, particularly of high tech companies. Investor became optimistic about investing in information technology.

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DURING 1990s STOCK MARKET CRASH

When optimism faded, and stock price fell by 25% from Aug 2000 to 2001. Reduced household wealth which in turn, reduce consumer spending. Less profit on new technologies lead to fall in investment Aggregate demand shifted to the left.
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CASE STUDY:

The U.S. recession of 2001

Causes: 1) Stock market decline qC
1500 1200 900 600 300 1995
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Index (1942 = 100)

Standard & Poors 500

1996

1997

1998

1999

2000

2001

2002

2003

CHANGES DUE TO INCREASED UNCERTAINTY

Week After the terrorists attack on New York and Washington on Sept 11, 2001, The stock fell another 12%. Biggest weekly loss since the Great Depression of 1930s. Increased Uncertainty which lead fall in consumer & business confidence

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 During 2001 and 2002 several major corporations, including Enron and WorldCom were found to have mislead the public about their profitability.  Reduced stock prices, discouraged investor to investment.  Resulted the stock market to further depressed aggregate demand.
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