ECON201 (Neri) Exam ii

ECON201 (Neri) Exam ii - Macro Ch. 9 Economic Fluctuations...

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Macro Ch. 9 Economic Fluctuations Economic Fluctuations during recessions, output (real GDP) declines -occasionally sharply during expansions output rises quickly--usually faster than potential output is rising. Boom o period of time during which real GDP is above potential GDP Why do we need another model? Shifts in Labor Demand the classical model assumes that the market always clears Labor Demand = Labor Supply at Full Employment Shifts in the labor demand curve o not very large from year to year o classical model cannot explain economic fluctuations thru shifts in labor demand Sudden shifts of the labor supply curve o unlikely to occur o could not accurately describe the facts of the economic cycle o classical model cannot explain fluctuations through shifts in the supply of labor The Verdict the classical model cannot explain Economic Fluctuations o classical model assumes that the market always clears o does a poor job explaining the economy in the short run o cannot explain the facts of short run economic fluctuations with a model in which the labor market always clears. What Triggers Economic Fluctuations? Recession o qualified ppl want to work at the going wage rate, but firms wont hire them Boom o firms -desperate to hire workers Economy deviates from full employment eqm of classical model Examples of Recessions and Expansions Recessions can be set off by o increase in oil prices o military cutbacks o reduction in planned investment spending o Fed Res. -sudden increases in interest rates Strong expansion -caused by o military buildups o falling oil prices o sharp increase in planned investment spending Recession a decrease in spending o causes production cutbacks in one or more sectors of the economy (housing or autos) o firms lay off workers o laid off workers cut back their own spending on other products o causing further layoffs in other sectors the economy can continue sliding downward and remain below potential Expansion higher spending o greater production o higher employment o greater spending o possibly leading to a boom in which the economy remains overheated for some time
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Ch. 10 Short Run Macro Model Short Run Macro Model Short run macro model o focuses on changes in spending C, G, and NX in explaining fluctuations in real GDP short run macro model focuses on changes in spending o spending on things that are included in US GDP household consumption spending business spending -planned investment spending govt spending on goods and services -govt purchases foreign spending on US goods and services measured as net exports (NX = export - imports) all in real terms Consumption Spending What determines household consumption spending? o
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This note was uploaded on 04/19/2008 for the course ECON 201 taught by Professor Shea during the Fall '08 term at Maryland.

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ECON201 (Neri) Exam ii - Macro Ch. 9 Economic Fluctuations...

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