U.S. Economic Growth and Inflation Since 1970

This activity is for macro principles students. Prior knowledge includes understanding the meaning of inflation and economic growth. There are no class size limitations and the activity takes about 40 minutes. This activity can be seen to a follow-on to "Calculating Economic Growth and Inflation from FRED" but both do stand on their own. However, do note that some of the the instructions to students is identical between the two activities.

Overview

One core area of macro principles is describing events in the economy. In order to do this, students need to know a bit of the history of macro variables; when their history is known, students can then explain their behavior. This exercise has students explore and analyze key variables of inflation and growth since 1970. Note that in total there are five questions.

Expected Student Learning Outcomes

After completing this exercise, students will be able to explain the history of U.S. inflation and growth since 1970.

Information Given to Students

U.S. Economic Growth and Inflation Since 1970 (Microsoft Word 2007 (.docx) 13kB Jul19 18)

Events in the economy at large affect each of us. For example, a rapidly growing economy provides many more job opportunities for workers than a slowly growing one. If you look over the past 50 years you'll see that in some decades growth was much faster than in other decades. There were many more opportunities for workers in the faster growing decades. It is very likely in the years to come we'll periods of both high and slow growth so it is important to be able to understand the past to better understand what might happen in the years to come. The rate of inflation is another important variable – if inflation is high, a worker would hope that their nominal salaries would be rising quickly to stay ahead of inflation. While the U.S. last had high rates of inflation in the 1970s to the early 1980s (at times during these years, prices were rising more than 10% annually), even low rate of inflation (which we have seen since the early 1990s) can affect people's purchasing power. Again, by understanding the past we can better understand the years to come.

In this exercise you will use the FRED website (that is, https://fred.stlouisfed.org/ ) to understand the behavior of the U.S. economy since 1970; in particular, we will focus on economic growth and inflation.

Listed below are six important macroeconomic variables; select the three that are used to calculate economic growth, the inflation rate for the entire economy, and the inflation rate for consumers. After you have selected the appropriate three variables, you'll need to calculate growth and inflation as follows: in the upper right of the FRED page select "edit graph" and then under "units" select "percent change from the previous year." In your graphs the vertical gray bars represent recessions; the remaining white areas are expansions.
    nominal GDP (GDP)
    M1 money supply (M1SL)
    real GDP (GDPC1)
    the federal funds rate (FEDFUNDS)
    the GDP deflator (GDPDEF)
    the Consumer Price Index, or CPI (CPIAUCSL)

Now, please answer the following questions.
1. Since 1970, which variable is most likely to have a negative growth rate?
    A. economic growth
    B. inflation for the entire economy
    C. inflation for consumers
2. Since 1970, when was the most severe recession?
    A. 1970s
    B. 1980s
    C. 1990s
    D. 2000s
    E. 2010s
3. Since 1970, when was the inflation rate the highest and most variable?
    A. 1970s
    B. 1980s
    C. 1990s
    D. 2000s
    E. 2010s
4. How does economic growth in the 1990s compare to the 2010s?
    A. growth was higher in the 1990s
    B. growth was higher in the 2010s
    C. growth was about the same in both decades
5. Which of the following best describes what happens in the typical recession since 1970?
    A. falling prices, falling real GDP
    B. falling inflation, falling real GDP
    C. falling prices, falling economic growth
    D. falling inflation, falling economic growth

To carry out this exercise students should be familiar with how to calculate inflation and economic growth and the variables used to compute them. Here are some follow-up points for each of the five questions.

1. Since 1970, which variable is most likely to have a negative growth rate?

Be sure to connect inflation, deflation, expansions, and recessions to the answers to this question.

2. Since 1970, when was the most severe recession?

Be sure to briefly describe the severity of the Great Recession.

3. Since 1970, when was the inflation rate the highest and most variable?

Note how inflation measured by the CPI and GDP deflator shows broadly similar patterns. One might also mention that this is in spite of their very different values due to their base periods being decades apart.

4. How does economic growth in the 1990s compare to the 2010s?

Students might confuse the slopes of the data with their rates of growth. Also, be sure to mention anemic growth since the Great Recession.

5. Which of the following best describes what happens in the typical recession since 1970?

Students might conflate inflation with the CPI or GDP deflator as well as real GDP with economic growth.

Students should be able to describe the behavior of inflation and real GDP since 1970.

FRED: https://fred.stlouisfed.org .