Class Notes - 11-9-07

Class Notes - 11-9-07 - Macroeconomics Class Notes -...

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Macroeconomics – Class Notes - 11/9/07 SOURCES OF RECESSION Two reasons for recession: o A.D falls (shifts left) C, I, G, or NX falls Usually it is A.D that falls, specifically, Investment goods (accounts for [1/7] GDP, but also [2/3] of drop in GDP) Aggregate demand, when it falls, if not helped, it tends to stay down o A.S falls (shifts left) Stagflation Higher resource costs Inflationary expectations Stagflation - Falling output, rising prices Very difficult situation Keynes Sticky Wage Theory o It is very difficult for workers for take a wage cut (psychologically) o No natural rate of inflation JM Keynes When AD decreases significantly, we end up with a Depression Wages are “sticky”(difficult to adjust) Now we are stuck in a depression Solution: Get Congress (Government) to increase spending or cut taxes o This WILL stimulate the economy o These are the two fiscal tools of the government (increase spending, cut taxes) o Cutting taxes: AD rises Output rises When Congress changes taxes (T) or government spending
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Class Notes - 11-9-07 - Macroeconomics Class Notes -...

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