Tutorial_CHAP09

Tutorial_CHAP09 - CHAPTER 9 Introduction to Economic...

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1 Chapter Nine ® CHAPTER 9 Introduction to Economic Fluctuations A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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2 Chapter Nine Short-run fluctuations in output and employment are called the business cycle. In previous chapters, we developed theories to explain how the economy behaves in the long run; now we’ll seek to understand how the economy behaves in the short run.
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3 Chapter Nine GDP is the first place to start when analyzing the business cycle, since it is the largest gauge of economic conditions. The National Bureau of Economic Research (NBER) is the official determiner of whether the economy is suffering from a recession. A recession is usually defined by a period in which there are two consecutive declines in real GDP. In recessions, both consumption and investment decline; however, investment (business equipment, structures, new housing and inventories) is even more susceptible to decline.
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4 Chapter Nine In recessions, unemployment rises. This negative (when one rises, the other falls) relationship between unemployment and GDP is called Okun’s Law, after Arthur Okun, the economist who first studied it. In short, it is defined as: Percentage Change in Real GDP = 3.5% - 2 × the Change in the Unemployment Rate If the unemployment rate remains the same, real GDP grows by about 3.5 percent. For every percentage point the unemployment rate rises, real GDP growth typically falls by 2 percent. Hence, if the unemployment rate rises from 5 to 8 percent, then real GDP growth would be: Percentage Change in Real GDP = 3.5% - 2 × (8% - 5%) = - 2.5% In this case, GDP would fall by 2.5%, indicating that the economy is in a recession.
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5 Chapter Nine Many economists in business and government have the role of forecasting short-run fluctuations in the economy. One way that economists arrive at forecasts is through looking at leading indicators. Each month, the Conference Board, a private economics Research announces the index of leading economic indicators, which consists of 10 data series.
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6 Chapter Nine 1) Average workweek of production workers in manufacturing 2) Average initial weekly claims for unemployment insurance 3) New orders for consumer goods and materials adjusted for inflation 4) New orders, nondefense capital goods 5) Vendor performance 6) New building permits issued 7) Index of stock prices 8) Money-supply ( M 2) adjusted for inflation 9) Interest rate spread: the yield spread between 10-year Treasury notes and 3-month treasury bills 10) Index of consumer expectations
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7 Chapter Nine Classical macroeconomic theory applies to the long run but not to the short run–WHY? The short run and long run differ in terms of the treatment of prices. 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.
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This note was uploaded on 04/29/2009 for the course ECO 3302 taught by Professor Avdjiev during the Spring '08 term at SMU.

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Tutorial_CHAP09 - CHAPTER 9 Introduction to Economic...

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