Practice English Speaking&Listening with: Demand-pull inflation under Johnson | Macroeconomics | Khan Academy

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Male voice: What I want to do in this video

is a little bit of 1960's U.S. economic history

and then just see if our Aggregate Demand

Aggregate Supply model fits the description

of what actually happened. One could argue

you don't need the ADAS model to describe what happened,

but we should at least make sure that it does

describe what happened. If we go to 1960,

this is the very end of the Eisenhower administration.

Eisenhower was a Republican in office. The only

reason why I give 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

it 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. In 1960, the Republicans

were in power. There was a recession. One could

argue that was a major reason why the Democratic

candidate in the 1960 election was able to win,

John F. Kennedy. In 1961, JFK is inaugurated.

He becomes President of the United States.

One of his top goals is to try to turn around

this economy. He does it with what can best

be described as Keynesian policies, and we'll

talk more about that in future videos.

In fact, I should probably devote many

videos to Keynesian policies. It's the general idea

that the government might be able to turn around

a recession by sparking demand. The way

that it would spark demand is try to put

more money in people's pockets, or even

in businesses' pockets. 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.

These policies get implemented and over

John F. Kennedy's term you do have GDP begins

to turn back around, unemployment, I'll just write

employment goes up, and inflation stays low.

Inflation is low.

These are all of the things that you want in an economy.

Unfortunately, this is just kind of a sad human event,

in 1963, John F. Kennedy, you probably know,

is assassinated. Then his Vice President,

Lyndon Baines Johnson, that is LBJ right over there,

Lyndon Baines Johnson becomes President.

LBJ becomes President. A little bit of trivia:

He's tied for the tallest President in U.S. history,

tied with Abraham Lincoln at 6'4".

He inherits a very, very good economy; almost,

one could argue, a perfect economy.

If Keynesian policies were really to be practiced

here to their full idea, in theory, once

the economy started to get a little bit really

overheated and really approaching its potential,

in 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, and in fact he added more

fuel to the fire. One could argue that 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 major war for the United States

under Lyndon Baines Johnson.

So some combination of Vietnam, and he had a huge

number of social programs, increased government

spending, to try to ease inequality in the U.S. as well,

so social programs. One could call it guns and butter.

Social programs to try to ease inequality.

The net effect of this is government spending

even though the economy was already red hot,

it was already at its potential, he wanted

to increase government spending even more,

so he kind of took it beyond its potential.

He made it overheat a little bit and what happens

in 1966 and onwards is that you have inflation

starting to grow at a fairly uncomfortable rate.

Inflation starts to grow dramatically.

Just to get a sense of it, when I keep saying

that the economy was at its potential and maybe

he might have taken a little bit of his pedal

off the gas, or his foot off of the pedal,

I should say, is as we get into the beginning

of his administration, 1964-1965, unemployment

is in the 4-5% range. Inflation is in the 1-2% range.

GDP is growing at a very healthy rate.

Despite that, and maybe 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 soldiers'

salaries, it goes to companies that provide,

I guess that make napalm or make boats or make

whatever else. 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 maybe even beyond its

natural capacity. Let's see whether our

ADAS model would make, would allow for this to happen,

or would describe this, or would predict this

given what was going on. Let's draw ...

That right over there is my price axis.

This right over here is my real GDP axis.

Let me scroll down a little bit.

This right over here is real GDP.

If we go into the 1964-1965 timeframe,

you could say that the U.S. is performing

at its potential GDP. When I talk about

its potential GDP, I'm saying that on the long run,

assuming that people aren't overworked,

assuming that factories are getting their proper

maintenance, they're not being run so hard

that they start cracking at the seams,

this is how much that the U.S. can produce.

If theory, if everyone worked even harder

and didn't sleep and were doing things in an

unsustainable way, they might even be able

to produce more. One could view this as

a theoretical maximum. When we talk about potential

we're not talking about that short term

theoretical maximum, we're talking about

the maximum GDP that an economy can produce,

I guess you could say, in a healthy way,

or over the long run, assuming that people

aren't overworked and that the factories

aren't overworked in some way, shape or form.

This could be our situation maybe in 1964-1965.

Let's draw this right over here is the level of prices.

We just want to see if, in general, we get

this type of thing happening from our model.

This is our aggregate supply in the long run.

Our aggregate supply in the short run we know

might look something like this.

That's aggregate supply in the short run.

Then from our model we will assume ...

Let me draw that a little bit neater so it intersects

a little bit better. This right over here

is aggregate ... let me draw it a little bit

better than that with the slope ...

This is our aggregate supply in the short run.

Aggregate supply in the short run.

Let's draw our aggregate demand.

I'll do that in this green color.

Aggregate demand might look something like that.

That is our aggregate demand.

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. What's going to happen?

That money's ending up in company and people's

pockets, they're 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.

Aggregate demand is going to shift to the right.

Maybe it goes, it shifts to the right, and maybe

it goes someplace right over there.

What is the new short term equilibrium?

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.

Actually, if you look at the data in 1966-1967,

unemployment did become ridiculously low.

It even got in kind of the three point something percent

for a little while. Many people would argue

that even now that is an unnaturally low level

of unemployment; that people 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. Right over there.

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.

The Description of Demand-pull inflation under Johnson | Macroeconomics | Khan Academy