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Todd A. Knoop - Recessions and Depressions: Understanding Business Cycles

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The economy of any nation is an intricate web of relationships among the factors determining supply and demand?and everything that affects them, from inflation to taxes to the stock market. The study of business cycles attempts to explain why economies grow and contract, experiencing periods of prosperity and pain. Consistent with the popular conception of economics as the dismal science, economists secretly long for recessions (periods of negative growth) and depressions (severe contractions), not because they enjoy their devastating impact on human welfare, but because these downturns serve as excellent laboratories for observing what happens when markets break down. Despite over two centuries of debate, no one has yet definitively unlocked the secrets of economic downturns and how they might be prevented.In Recessions and Depressions Todd Knoop traces the evolution of business cycle theory, from the classical model, which preceded the Great Depression, through the ground-breaking ideas of John Maynard Keynes, Milton Friedman, and their followers. He examines the strengths and limitations of each approach, in terms of explaining the impact of such factors as government policy, money supply, labor productivity, and wages. In the process, he presents an accessible introduction to what makes the economy tick, and offers new insights into understanding such historic events as the Great Depression, as well as more recent ones, such as the Asian meltdown in the 1990s, the financial crises in Latin America, and the U.S. recession of 2001, from which the United States is still recovering. Knoop reminds us that economists track record in forecasting business cycles leaves much to be desired, and the quest to fully understand what causes economic downturns?and their effects on individuals and families?continues.

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Cover

title Recessions and Depressions Understanding Business Cycles author - photo 1
title:Recessions and Depressions : Understanding Business Cycles
author:Knoop, Todd A.
publisher:Greenwood Publishing Group
isbn10 | asin:0275981622
print isbn13:9780275981624
ebook isbn13:9780313052118
language:English
subjectBusiness cycles, Economic forecasting, Business cycles--United States--History, Business cycles--History--20th century.
publication date:2004
lcc:HB3711.K63 2004eb
ddc:338.5/42
subject:Business cycles, Economic forecasting, Business cycles--United States--History, Business cycles--History--20th century.

Page i

Recessions and Depressions

Page ii

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Page iii

Recessions and Depressions

Understanding Business Cycles

Todd A.Knoop

Page iv Library of Congress Cataloging-in-Publication Data Knoop Todd A - photo 2

Page iv

Library of Congress Cataloging-in-Publication Data

Knoop, Todd A.
Recessions and depressions: understanding business cycles/Todd A.Knoop.
p. cm.
Includes bibliographical references and index.
ISBN 0275981622 (alk. paper)
1. Business cycles. 2. Economic forecasting. 3. Business cyclesUnited
StatesHistory. 4. Business cyclesHistory20th century. I. Title
HB3711.K63 2004
338.5'42dc22 2004049569

British Library Cataloguing in Publication Data is available.

Copyright 2004 by Todd A.Knoop

All rights reserved. No portion of this book may be
reproduced, by any process or technique, without the
express written consent of the publisher.

Library of Congress Catalog Card Number: 2004049569

ISBN: 0-275-98162-2

First published in 2004
Praeger Publishers, 88 Post Road West, Westport, CT 06881
An imprint of Greenwood Publishing Group, Inc.
www.praeger.com

Printed in the United States of America

Picture 3

The paper used in this book complies with the
Permanent Paper Standard issued by the National
Information Standards Organization (Z39.481984).

10 9 8 7 6 5 4 3 2 1

Page v

To my loving and supportive family: Deb, Edie, and Daphne

Page vi

In the middle of the last century, a great dispute arose among astronomers respecting one of the planets. Some, in their folly, commenced a war of words, and wrote hot books against each other; others, in their wisdom, improved their telescopes and soon settled the question forever. Education should imitate the latter.

Horace Mann, Lectures on Education (1855)

Page vii

Contents

Illustrations

ix

Preface

xiii

Part I:The Facts of Business Cycles

Why Study Business Cycles?

Describing Business Cycles

Part II:The Macroeconomic Theory of Business Cycles and Forecasting

Early Business Cycle Theories

Keynes and Keynesian Theory

The Monetarist Model

The Rational Expectations Model

Real Business Cycle Models

New Keynesian Models

Macroeconomic Forecasting

Part III:Business Cycles in the United States

The Great Depression

Postwar Business Cycles in the United States

A New Economy in the United States?

Part IV:Modern International Recessions and Depressions

The East Asian Crisis

Argentina and the Role of the International Monetary Fund

The Great Recession in Japan

Conclusions: What We Do and Do Not Know about Business Cycles

Page viii

Appendix: A Brief Comparison of Major Business Cycle Theories

Glossary

Bibliography

Index

Page ix

Illustrations

Figures

2.1

Real GDP Growth, Recessions Noted (chained 1996 dollars)

2.2

Average Duration of Expansions and Recessions

2.3

Monthly Percentage Increases and Decreases in Industrial Production during Business Cycles

3.1

Supply and Demand in the Cobweb Theory after a Temporary Fall in Supply

3.2

Effects of a Tax on Labor Income on the Labor Market and Aggregate Demand and Supply

3.3

Effects of a Tax on Savings (or Investment) on the Labor Market and Aggregate Demand and Supply

4.1

A Decrease in the Price Level in Keyness Labor Market

4.2

A Decrease in Aggregate Demand in Keyness Model

4.3

Unemployment and Inflation Rates in the United States during the 1960s

4.4

The Keynesian Phillips Curve.

4.5

The Price Level, Nominal Wage, and Real Wage during the Great Depression

4.6

Output Growth and Inflation, 19201940 and 19701990

5.1

The Effects of an Increase in the Money Supply in the Monetarist Model

5.2

The Effects of Targeting an Output Level above the Natural Rate

5.3

The Unemployment Rate and the Natural Rate of Unemployment

Page x

5.4

The Phillips Curve Tradeoff Changes as the Expected Price Level Increases

5.5

Yearly Money Growth and Recessions

5.6

Currency-to-Deposit and Excess Reserve-to-Deposit Ratios

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