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Private consumption expenditure

1. What is the current business cycle situation in the U.S. today (Fall 2009)? Discuss each sector of aggregate demand (C+I+G+X), interest rates, and inflation.

2. What macroeconomic policy mix do you anticipate that the President and the Federal Reserve FOMC will set for 2010? Where would you find the formal statements of these policies?

3. Give a specific example from the 1920's, 1960's, 1970's, or 1980's to indicate the probable outcome of these policies in 2010-2011. (draw an AD/AS or IS/LM graph to illustrate)

Solution Preview

1. The data for GDP and its components can be obtained from the Bureau of Economic Analysis at

The latest period for which data is available is the second quarter of 2009. Data for the third quarter (July-September) will not be out till early November at the earliest. Based on that data for the second quarter of 2009:

GDP = $14143.3 billion
C = $9996.6 billion
I = $1558.6 billion
G = $2926.8 billion
X = $1492.2 billion
M = $1830.8 billion

Private consumption expenditure is the largest component of the GDP and aggregate demand, followed by government expenditure and investment. The point to note here is that over the last 4 quarters the biggest fall has been in gross investment. This indicates that the credit crisis had a very big impact on how firms were investing. Tight credit meant the firms were not in a position to generate money for new investment, and the lack of confidence added further fuel to this problem. The next biggest fall was in imports that fell by almost $800 billion, quarter-on-quarter over the last year. This improved the US trade deficit.

Coming to inflation we can get the data ...

Solution Summary

Private consumption expenditure is exemplified.