Modern Principles: MacroeconomicsSee the Invisible Hand: Understand Your World

Tyler Cowen and Alex Tabarrok

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100

120

140

160

180

200

Shi

ller I

ndex

YearS ourc e: R ober t S hi l ler 's Ir ra tional E x uberanc e, updated http ://w w w .i r rationalex uberanc e.c om /

Index of Real House Prices, 1950-2010The H ous ing Bubble

Housing Starts and Vacancies

Vacancy Rate

Starts

56

78

91

0H

ou

sin

g V

aca

ncy

Ra

te

500

100

01

50

02

00

02

50

0H

ou

sin

g S

tart

s (1

000

s)

yearNote: Vacancy rate defined as year round vacant (non-seasonal) housing unit for sale, rent orheld off market as a fraction of all housing units.Source: U.S. Census Bureau, Housing and Household Economic Statistics Division.

1965-2010Housing Starts and Housing Vacancy Rate

Real GDPgrowth rate

InflationRate (p)

Solow growthcurve

3%

AD (M 4%)v

SRAS

4%

��������������M

C

I

AD (M 7%)v

The Great Recession and the Great Fall in AD

-1%

-3%

Growth of Shadow Banking

New Solow growth curve

Old Solow growth curve

New SRAS Old SRAS

a

b

c

Real shock

16%

8%

-3% -1% 3%

Inflation rate

(π)

Real GDP growth rate

AD (M + v = 15%)→ →

AD (M + v = 5%)→ →

M →

The Negative Real Shock Dilemma

Modern Principles: MacroeconomicsSee the Invisible Hand: Understand Your World

Tyler Cowen and Alex Tabarrok