Chapter 14_The Business Cycle

Chapter 14_The Business Cycle - THE BUSINESS CYCLE CHAPTER...

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THE BUSINESS CYCLE 14 CHAPTER
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Objectives After studying this chapter, you will able to Distinguish among the different theories of the business cycle Explain the Keynesian and monetarist theories of the business cycle Explain the new classical and new Keynesian theories of the business cycle Explain real business cycle theory Describe the origins of, and the mechanisms at work during, the expansion of the 1990s, the recession of 2001, and the Great Depression
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Must What Goes Up Always Come Down? In some ways, the 1990s were like the 1920s: rapid economic growth and unprecedented prosperity From 1929 through 1933, real GDP fell 30 percent and the economy entered the Great Depression, which lasted until World War II There have been ten recessions since 1945; must the cycle continue?
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Cycle Patterns, Impulses, and Mechanisms Business Cycle Patterns The business cycle is an irregular and nonrepeating up-and-down movement of business activity that takes place around a generally rising trend and that shows great diversity. Table 30.1 in the textbook dates business cycles since 1920 and the magnitude of the fall in real GDP from peak to trough.
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Cycle Patterns, Impulses, and Mechanisms Cycle Impulses and Mechanisms Cycles can be like the ball in a tennis match, the light of night and day, or a child’s rocking horse. These cycles differ according to the role of outside force and basic system design.
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Cycle Patterns, Impulses, and Mechanisms In a tennis match, an outside force is applied at each turning point In the night and day cycle, no outside force is applied and the cycle results from the design of the solar system In the rocking of a horse, an outside force must be applied to start the cycle but then the cycle proceeds automatically until it needs another outside force. The business cycle is a combination of all three types of cycles; that is, both outside forces (the “impulse”) and design (the “mechanism”) are important.
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Cycle Patterns, Impulses, and Mechanisms The Central Role of Investment and Capital All theories of the business cycle agree that investment and the accumulation of capital play a crucial role. Recessions begin when investment slows and recessions turn into expansions when investment increases. Investment and capital are crucial parts of cycles, but are not the only important parts.
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Cycle Patterns, Impulses, and Mechanisms The AS-AD Model All business cycle theories can be described in terms of the AS-AD model. Business cycle theories can be divided into two types Aggregate demand theories Real business cycle theory.
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Aggregate Demand Theories of the Business Cycle Three types of aggregate demand theories have been proposed: Keynesian Monetarist Rational expectations
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Aggregate Demand Theories of the Business Cycle Keynesian Theory The Keynesian theory of the business cycle regards volatile expectations as the main source of business cycle fluctuations.
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Aggregate Demand Theories of the Business Cycle
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Chapter 14_The Business Cycle - THE BUSINESS CYCLE CHAPTER...

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