Ch012 - Chapter 12 Short-term Economic Fluctuations: An...

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Chapter 12 Short-term Economic Fluctuations: An Introduction Overview This chapter presents some background on the history and characteristics of short-term economic fluctuations. It then goes on to focus on the causes of short-term fluctuations and the policy responses available to address them. The chapter sets up the analysis that follows, where the basic Keynesian model and an expanded version of it are presented, along with some of the shortcomings of the model. Core Principles Efficiency Principle - the chapter discusses recessions as inefficient, that is, reducing the total economic "pie." Cost-Benefit Principle - the chapter discusses the costs and benefits of auction markets. Equilibrium Principle - the chapter looks at how changes in markets lead to the market- clearing price in terms of a Coca-Cola vending machine that can sense increases in temperature (and by implication, in demand) and then increase the price. Important Concepts Covered Recession/depression Peak/trough Expansion/boom Potential output Output gap Recessionary and expansionary gap Natural rate of unemployment Okun's Law Answers to Text Questions and Problems Answers to Review Questions 1. A recession is a period in which the economy is growing at a rate significantly below normal, whereas an expansion is a period in which the economy is growing at a rate significantly above normal. The beginning of a recession is called the peak (the point at 177
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which economic activity reaches its highest point and begins to decline), whereas the end point of a recession (and the beginning of the expansion) is called a trough. In the postwar United States, expansions have been considerably longer than recessions on average. 2.
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This note was uploaded on 04/15/2008 for the course ECO 181 taught by Professor Cherry during the Spring '07 term at SUNY Buffalo.

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Ch012 - Chapter 12 Short-term Economic Fluctuations: An...

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