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Animal Spirits and Gas Prices

May 24, 2011 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Government, Households, Labor, Macroeconomic Measurement • 248 Views    No Comments

Is a 9-cent drop enough to ignite our “animal spirits?” The 9-cent decrease refers to the average national price of a gallon of regular gasoline. And “animal spirits” is the optimism that leads to more buying and investing.

During the 1930s Great Depression, British economist John Maynard Keynes (1883-1946) said that statistics such as lower interest rates could theoretically stimulate economic activity. However, to generate growth, we also need “animal spirits.”

Fast forward to 2011. Analysts cite gas prices and unemployment as the two key variables behind rising and falling consumer sentiment. Plunging from a high of 112 during 2000, the University of Michigan measure of consumer sentiment is now 72.4.

Why care about consumers’ sentiments (aka their animal spirits)? Consumer spending is the largest component of our GDP.

The Economic Lesson

Initiated by economist Arthur Okun (1928-1980), the “misery index” is the total of the inflation rate and unemployment. Currently, our misery index is 12.16.

An Economic Question: Specfically referring to its inflation and unemployment components, how does the misery index relate to consumer sentiment and animal spirits?

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