Topic 8: business cycles and economic fluctuations – Flashcards

Amplitudes have moderated, they are smaller recently. Recessions have become less frequent, more time in between each recession

unemployment rate

unemployment and real GDP

a variable that rises when GDP rises, for example, employment

a variable that falls when GDP rises, for example, unemployment and inventories

NBER, National Bureau of Economic Research is responsible for dating the peaks, or starts of recession, and the ends or troughs of recession

-When an economy experiences falling output, rising unemployment - measured from peak to trough

F(K,L) therefore labor, capital and productivity determine our potential output growth

- relationship between RGDP and unemployment. The relationship is negative - %?RGDP= 3-2(?UR) - this shows that if we are at long run natural rate, ?UR=0, therefore RGDP should naturally grow at a 3% rate

indicates a recession

-prices are sticky, not fully flexible - only 50% of firms change their prices more than once a year

SRAS is horizontal in short run if we assume prices completely fixed, but slopes upward if we assume only some prices are sticky

-In the long run, MV=PY and V and Y are fixed in long run, therefore, if M increases or decreases, P follows suit - long run money neutrality AD=MV

- MV=PY and V and P are fixed, so if M increases or decreases, Y will follow suit, therefore money is not neutral in the short run AD=MV

- increases the money supply through lowering the iff. This can be accomplished through buying bonds, decreasing the rrr, decreasing the interest on reserves or decreasing the discount rate - increasing the money supply means increasing M, therefore the AD curve will shift out - In short run, this will increase Y, and prices will not change - In long run, firms will increase their prices and therefore, SRAS curve will shift up, and output, Y, will fall back down to equilibrium full employment level

- an outside factor that affects money demand will cause Md?, and therefore V?. - If V?, this causes AD? because AD=MV - AD curve shifts right - In SR, this causes a decrease in output, Y, but no change in prices - In long run, firms will lower prices since Y decreased, and therefore SRAS curve will shift down (out). Therefore, if Fed does nothing, prices decrease but output goes back to normal- A?B?C.

1.) ?Riskiness of alternative assets causes Md? 2.) ?Liquidity of alternative assets causes Md? 3.) ?Efficiency of Payment mechanisms for alternative assets causes Md? 4.) ?Wealth causes Md? When Md increases, Velocity decreases!

- increase in Md due to outside reason causes Velocity to fall - When V?, causes AD to decrease, shifts curve right - AD curve shift causes fall in output in the short run, no change in prices - Fed sees this fall in output and decides to increase the money supply to counteract the decrease in velocity and meet Md - When they increase money supply, AD=MV, so AD curve shifts back to its original place. Therefore, prices never fall, and the economy goes from A?B?A, therefore only period of low output was result

velocity does not depend on i, only depends on Md

- Supply shock that results in a fall in SRAS shifts the SRAS curve up, as this is the same as shifting it in - shift in SRAS causes Y? and P? in the short run- this is called stagflation - in long run, Fed will want to stabilize output, so will increase money supply, ?Ms. Fed will do this through ?iff. This will shift the AD curve out because AD=MV, and therefore economy in LR will move back to Yfe, except prices will be permanently higher, which is against dual mandate. - if ECB, since they care about prices the most, they would tighten monetary policy to stabilize prices at a lower output

- could happen if there was a drought, ?SRAS - Nationwide strike ?SRAS - Commodity price shock- example is oil ?SRAS

- characterized by falling output and inflation (rising prices) - happens when there is a negative supply shock

- keep inflation at a low, stable rate around 2% - they do not care about maximum sustainable output and employment

eventually, conservation efforts will increase, and alternate technology will be explored until SRAS shifts back down and we will move back to original point A