Chapter 12: Short-Run Fluctuations Flashcards
Economic fluctuations or Business cycles
Are short run changes in the growth of GDP.
What is a recession?
An episode of negative economic growth.
What is an expansion?
A period of positive growth. Expansions are periods between recessions.
NBER?
National Bureau of Economic Research that defines expansions and recessions.
Economic Fluctuations has three key properties.
- Co-movement of many macroeconomic variables
- Limited predictability of fluctuations
- Persistence in the rate of economic growth
What moves positively with real GDP? (Goes up ?)
Real consumption, real investment , and employment.
What moves negatively with GDP:
Unemployment
How do aggregate macro variables grow on contract?
They do this during booms and busts exhibiting a pattern of positive or negative co movement .
What happens since recessions and expansions do not follow a repetitive easily predictable pattern?
it is impossible to forecast during an expansion when the expansion or recession is going to end .
Even through the beginnings and ends of recession are unpredictable
economic growth is not random but persistent.
At the beginning of a recession the labor demand curve shifts to the left because
- Fall in output prices
- Decrease in output demand
- Decrease in labor productivity
- rise in input prices
In the case of a recession , if the wages are flexible what will happen?
A leftward shift in the labor demand curve will happen and lead to a fall in wages and a decrease in the quantity of labor , GDP will decrease.
If wages are downward right, the leftward shift in the labor curve will lead to ?
No change in the wage rate and a larger decrease in the quantity of labor.
As a result of no change in the wage rate and a decrease in the quantity of labor what will happen?
Result output will decrease more under downward rigid wages than under flexible wages and GDP will decrease by even more.
What are the three different schools of though on economic fluctuations?
- Real business cycle theory
- Keynesian theory
- Financial and monetary aid
Real business cycle theory
Emphasizes changes in productivity and technology. Technological advances and other productivity enhancing innovation that cause expansions.
Keynesian Theory
Focuses on change in expectations of the future. Animal spirits are the psychological factors the lead to changes in business and consumer mood or sentiment . Animal spirits can lead to decreases in spending or increases in spending .
Financial and Monetary Theory
Whose main proponent is Milton Friedman looks at changes in prices and interest rates.
A decrease in the money supply (m2)
Will cause the price level to fall and also cause an increase in the real interest rate
A fall in the price level will?
Reduce employment because of downward wage rigidity.
What will higher interest rates do ?
Reduce investment spending by firms.
What are multipliers?
Things that can amplify the effects of any economic shock regardless of its sources.
What is the cycle of multipliers ?
Consumption fails, the firms revenues fall which causes labor demand to fall. Layoffs happen and unemployment rises. Then household income falls.
How can multipliers reduce labor demand?
By a fall in asset prices, A rise in mortgage defaults , A rise in household and firm bankruptcies.
The leftward shift in labor supply has an impact when ?
If the new market clearing wage is above the original wage rate.
What factors led the the 2007 housing crisis?
A fall in housing prices, which caused a collapse in new construction. Spiraling mortgage defaults making the entire financial system freeze up
