Reading Notes-Chap 9

Reading Notes-Chap 9 - aggregate price level o Reductions...

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Econ 232H Reading Notes Chapter 9 Business Cycle and GDP GDP measures total income and total expenditure in the economy. Recession: a period of at least 2 consecutive quarters of declining real GDP. Okun’s law: % change in Real GDP=3.5%-2xchange in unemployment rate. Leading economic indicators: Average workweek of production workers in manufacturing, aver. Initial weekly claims for unemp. Insurance. New orders for consumer goods and materials, adjusted for inflation, new orders nondefense capital goods, vendor performance, new building permits issued, index of stock prices, money supply adjusted for inflation, interest rate spread, and index of consumer expectations. Time horizons in microeconomics In the long run, prices are flexible and can respond to changes in supply or demand. In the short run, many prices are “sticky” at some predetermined level. Aggregate demand-relationship between quantity of output demanded and the
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Unformatted text preview: aggregate price level. o Reductions in Money supply shift the aggregate demand curve to the left. • Aggregate supply-the relationship between the quantity of goods and services supplied and the price level. o LR AS is vertical, SR is horizontal. o In the SR when prices are sticky, a fall in aggregate demand lowers the level of output. o Over long periods of time, prices are flexible and the aggregate supply curve is vertical and changes in aggregate demand affect the price level but not the output. Over short periods of time, rices are sticky, the aggregate supply curve is flat, and changes in aggregate demand do affect the economy’s output of G and s. o Fall in aggregate demand lowers output in the short run but in the long run affects only the price level. o Stabilization policy-policy actions aimed at reducing the severity of short run economic fluctuations....
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