11-16-07 - -people have “rational...

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Business Cycles -refers to situations in which real gdp differs from potential gdp -why do business cycles exist? 1. Mainstream theory 2 real business cycle theories Mainstream theory 1. Business cycles exist b/c AD moves around unpredictable -potential gdp always increasing b/c labor demand always increasing -increases in potential gdp are relatively steady -recall LD=MPL (so LP increases b/c labor becomes more predictable -however real gdp is not steady -so according to “mainstream” theory business cycles exist b/c AD increases slower or faster than increases in LRAS -what causes volatility in AD to create business cycles? 1. Keynesian -ad is volatile due to “animal spirits” 2. Monetarists- -ad is volatile b/c ms is volatile 2. New classical
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Unformatted text preview: -people have “rational expectations”-deviations from expectations create volatility in AD 4. New Keynesian-agree that unexpected events more ad-but b/c wages sticky, expected events can also effect AD RBC theory-no Ad/as model in RBC-RBC says business cycles come from changes in “productivity” Productivity output per unit of input-main inputs are labor + capital-how does productivity of labor change? Labor mkt-recall LD=MPL-and MPL is labor productivity-RBC says MPL is volatile-LD is volatile Capital MKT/loan able funds Market-increase in tech, will create demand for capital, and increase in demand for loan able funds-RBC says demand for capital volatile-all this volatility affects output-so output is more volatile...
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11-16-07 - -people have “rational...

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