Short-Run Economic Fluctuations

Short-Run Economic Fluctuations - Short-Run Economic...

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Unformatted text preview: Short-Run Economic Fluctuations Learning Team E ECO/372 May 29, 2017 Professor Neal Johnson Introduction Short run economic fluctuations, what are they? • • Economic activity fluctuates year to year Economy can have booms and can have busts How do short run economic fluctuations affect Disney? • • Can cause a surge in disney park attendance Can cause drops in disney park attendance 3 Key Facts About Short Run Economic Fluctuations Fact 1: Economic Fluctuations are Irregular and Unpredictable 3 Key Facts About Short Run Economic Fluctuations Fact 2: Most Macroeconomic Quantities Fluctuate Together 3 Key Facts About Short Run Economic Fluctuations Fact 3: As Output Falls, Unemployment Rises How Economy in Short Run Differs from Economy in Long Run SHORT RUN • Prices and wages are in equilibrium • Declining marginal returns • Factors are fixed LONG RUN • Firms can come and go • Prices have an adjustment period • Factors of production are variable Economic Fluctuations and How Shifts in Either Aggregate Demand or Aggregate Supply can cause Recessions Using the Model of Aggregate Demand and Aggregate Supply Flat Economy Deflation Interest Rates Unemployme nt Full Employment Import and Export Balance Interest Rates Decline in the Long Run Controlled Budget Deficit and Surplus How Monetary Policy Affects Interest Rates and Aggregate Demand Mankiw, 2015 FISCAL and MONETARY POLICY Why Policymakers Face a Short-Run Trade-Off Between Inflation and Unemployment PHILLIPS CURVE AGGREGATE DEMAND AGGREATE SUPPLY SUPPLY SHOCK NATURAL-RATE HYPOTHESIS RELATIONSHIP BETWEEN SHORT-RUN PHILLIPS CURVE MODEL OF AGGREGATE DEMAND AND AGGREGATE SUPPLY (Mankiw 2015, p. ADVERSE SHOCK TO AGGREAGATE SUPPLY (Mankiw 2015, p. 492) Why the Inflation-Unemployment Tradeoff Disappears in the Long Run (MANKIW 2015, P. 486) Why the Inflation-Unemployment Tradeoff Disappears in the Long Run Inflation and Unemployment are related in a Negative Way The Trade Off is Temporary National Rate of Unemployment Why the Inflation-Unemployment Tradeoff Disappears in the Long Run Mankiw (2015) Policymake rs Expand Aggregate Demand • Lower Unemployment Rates • Higher Inflation Rates Policymake rs Contract Aggregate Demand • Will be able to Lower Demand • Risk having a Temporary High Unemployment Conclusion • • • • • • Short run economic fluctuations are unpredictable and can happen anytime Recessions will act with a domino effect Lowering intrest rates, increases spending Fiscal policy influences saving, investment, and growth in the long run If policymakers expand aggregate demand they then can lower unemployment rates, but higher inflation rates If policymakers contract aggregate demand then they will be able to lower the demand, but only at the risk of having a temporary high unemployment References Hayes, A. (2017). Why is Deflation Bad for the Economy?. Retrieved from why-deflation-bad-economy.asp Mankiw, N. G. (2015). Principles of Macroeconomics (7th Edition ed.). Stamford, CT: Cengage Learning. National Inflation Association (2017). Shocking Disney World Price Inflation. Retrieved from: ...
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