South-Western College Publishing - Economics  
Trouble Ahead?
Subject Productivity and Growth
Topic Aggregate Supply / Aggregate Demand
Key Words Inflation, interest rates, unemployment, investment, productivity
News Story

Asia's economic woes, Russia's economic turmoil, the recent downturn in the stock market: add these events together and the healthy economic picture of just a few months ago begins to look less well. The economy has slowed, but forecasters, buoyed by low inflation, falling interest rates, and still soaring consumer confidence, are not predicting recession, at least in the near future. The Blue Chip consensus of 50 economic forecasters predicts economic growth of about 2.4 percent annual rate for the second half of the year, and about the same for next year. A growth rate of this magnitude should keep unemployment from rising and not exert enough inflationary pressure to attract the attention and intervention of the Federal Reserve.

The operative word is probably caution. There is a litany of economic and natural disasters -- a stock market crash, deteriorating economic conditions in Asia -- that can change the forecaster's opinion and the economy quite rapidly. While Asia's troubles have worsened our trade deficit, a stronger dollar, lower interest rates, and cheaper raw materials have raised the real incomes of consumers as well as the profits of many companies, especially in the finance, transportation, and consumer goods sectors. Consumers show no sign of deserting the stock market in the face of the recent downturn. Consumers' net worth is $12 trillion higher than four years ago, and the downturn has not significantly reduced these gains.

Business investment is slowing and corporate profits have flattened somewhat, but overall, profit margins remain at historical highs. Productivity rose by 2-percent last year and wage costs, while rising, are not considered to be at levels that will add to inflationary pressures. Inventories, retail sales, business cash flow, all seem to be healthy. (Updated September 1, 1998)
Questions
  1. Using aggregate demand, aggregate supply curves, show an economy as a full- employment macroeconomic equilibrium.
  2. Indicate whether each of the following would cause a leftward or rightward shift in the aggregate demand or aggregate supply curve:
    a. A decline in US exports.
    b. A decrease in interest rates.
    c. A decrease in the wealth of consumers.
  3. What will happen to real GDP and the price level if:
    a. consumer wealth decreases.
    b. US exports decrease.
Source Sylvia Nasar, "Cloudy Blue Skies," The New York Times, August 15, 1998

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