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Video transcript

what I want to do in this video is a little bit of 1960s US economic history and then just see if our aggregate demand aggregate supply model fits the description of what actually happened and one could argue you don't need the a das model to to to describe what happened but we should at least make sure that it does describe what happened so if we go to 1960 so 1960 this is the very end of the Eisenhower administration Eisenhower was a Republican in office and I the only reason why I give his pot his party affiliation is because if the economy is weak and in 1960 the economy was weak and one can always debate whether it was due to the government or whether the weather was due to just the natural fluctuations in the economy but in general when the economy is weak it tends to go against the party that is in power and so in 1960 the Republicans were in power there was a recession and one could argue that was a major reason why the Democratic candidate in the 1960 election was able to win John F Kennedy and so in 1961 JFK is inaugurated he becomes President of the United States and one of his top goals is to try to turn around this economy and he does it with what can best be described as Keynes Ian's policies and we'll talk more about that in future videos in fact I should probably devote many videos to Keynes Ian's policies but it's a general idea that the government might be able to turn around or recession by sparking demand and the way that it would spark demand is try to put more money in people's pockets or even in business's pockets and it would do that through some combination of increased government spending maybe somehow giving money to the poor some types of transfer programs and tax cuts for people and for businesses so that they have more money to spend and so these policies get implemented and over john f kennedy's term you do have GDP GDP begins to turn back around unemployment unemployment so I'll just write employment goes up employment goes up and inflation stays low inflation inflation is low so these are all of the things that you want in and economy and unfortunate unfortunately and this is just kind of a sad human event in 1963 1963 John F Kennedy you probably know is assassinated and then his Vice President Lyndon Baines Johnson that is LBJ right over there Lyndon Baines Johnson becomes president lb J becomes president a little bit of trivia he's tied for the tallest president in US history tied with Abraham Lincoln at six foot four and so he inherits a very very good economy almost one could argue a perfect economy and in if if Keynes Ian policies were really to be practiced here to their full to their full idea in theory once the economy started to get a little bit really overheated and really approaching its potential and maybe 1964-1965 the government maybe should have started to pull back a little bit on its spending so that the economy doesn't get overheated but Lyndon Baines Johnson did not do this he kept things going in fact he added more fuel to the fire and one could argue some of it was driven by geopolitics a major factor was right over here the Vietnam War which was escalated in a major way under LBJ's administration JFK was already dabbling in Vietnam but it became a really a major war for the United States under Lyndon Baines Johnson so some combination of Vietnam and he had a Vietnam and he had a huge number of social programs increased government spending to try to ease inequality in the US as well so social program so one could call guns and butter social social programs to try to ease inequality but the the the net effect of this is government spending even though the economy was already red-hot it was already at its potential it was he wanted to increase government spending even more and so he kind of took it beyond its potential he made it overheat a little bit and what happens in 1966 and onwards 1966 and onwards is that you have inflation starting to grow at a fairly uncomfortable rate inflation starts to grow dramatically and just to get a sense of it when I keep saying that the the economy was at its potential and maybe he might have taken a little his pedal off the gas or his foot off of the pedal I should say is in as we get into the beginning of his administration 1964-1965 unemployment is in the four five percent range inflation is in the one two percent range GDP is growing at a very at a very healthy rate but despite that and maybe he was you know he could argue maybe his hand was forced by geopolitical events especially on military funding the government continues to even spend more money stimulates things even more because that money goes to soldier salaries it goes to companies that provide I guess that make napalm or make boats or make whatever else and so you get more even and all of these government programs inject even more dollars into the economy and so you ended up with inflation the economy was already operating at close to capacity and it made it go even maybe even beyond its natural capacity and let's see whether our a das model this would make would allow for this to happen or would describe this or would predict this given what was going on so let's draw so that right over there is my price axis and this right over here is my real GDP axis we scroll down a little bit this right over here is real GDP and so if we go into the 1964 1965 time frame you could say that u.s. is performing at its potential GDP its potential GDP and when I talk about its potential GDP I'm saying that on the long-run assuming that people aren't overworked assuming that factories they're getting their proper maintenance they're not being kind of run so hard that they start you know kind of cracking at the seams this is how much that the US can produce in theory if everyone worked even harder and didn't sleep and it kind of do we're doing things in an unsustainable way they might even be able to they might even be able to produce more one could view this as a theoretical maximum but when we talk about potential we're not talking about that short-term theoretical maximum we're talking about the kind of the the maximum GDP that a that a economy can produce I guess you could say in a healthy way or taking it or over the long-run assuming that people aren't overworked and that the factories aren't overworked in some way shape or form so this could be our situation maybe in 1964-1965 let's draw maybe this right over here is the level of prices but we just want to see if in general we get this type of thing happening from our model so this is our aggregate supply in the long run our aggregate supply in the short run we know might look something like aggregate supply and the short run might look something like this so that's aggregate supply in the short run and then from our model we will assume let me actually let me draw it a little bit neater so it intersects a little bit better so this right over here is aggregate let me draw it a little bit better than that what the slope so this is our aggregate supply in the short-run so aggregate supply in the short run and let's draw our aggregate demand aggregate demand I'll do that in this green color so aggregate demand might look something like that so that is our aggregate demand so this is 1964-1965 here we are the economy's humming along at its potential now more gas is thrown on the flame government accelerates its spending not just to turn on the economy now because of Vietnam and all of these social programs so what's going to happen well that money is ending up in company and people's pockets they are going to demand more it's going to shift the demand curve to the right at any given price they're going to demand more so aggregate demand is going to shift to the right and maybe it goes it shifts to the right and maybe it goes someplace right over there so what is the new short-term equilibrium well aggregate demand is intersecting aggregate supply right over here right over there and as we see the equilibrium level of prices on this model now has gone up our productivity we're now producing above potential we're overheating a little bit something on and actually if you look at the data in 1966 1967 unemployment did become ridiculously low it even had a gotten kind of the three point something percent for a little while so really and that some people and many people would argue that even that is an unnaturally level low level of unemployment that people and and factories are really operating at maybe beyond full capacity or beyond a sustainable full capacity but we see from this model what you think would happen actually does happen prices would go up and hat right over there and then on the long run you really wouldn't be able to sustain this level of producing above your potential and over the long run things would settle back right over here and all you're left with really is the inflation