Ch9_Business_cycles.pptx - Chapter 9 Business Cycles Hewei...

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Chapter 9 Business Cycles Hewei Shen University of Oklahoma 1
Introduction 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 -4 -2 0 2 4 6 8 Real GDP growth (annual %) Real GDP growth has a steady mean in the long run. In the short run, it fluctuates a lot. This is called business cycles. 2
This chapter Explain the difference between the short and long run in macroeconomics. Understand what happens during a business cycle. Explain how economists think about business cycles. Use the AD & AS model to explain the business cycle. 3
The Short Run and the Long Run in Macroeconomics 4
The short run and the long run in macro In the long run, equilibrium determined by supply & demand At equilibrium prices: no surplus or shortages. In the short run: disequilibrium may occur. E.g. hard to buy the latest popular iPhone. Similarly, in the short run, real GDP potential GDP may occur: Potential GDP: The level of real GDP attained when firms are producing at capacity and labor is fully employed. The real GDP may be above or below the potential GDP. Alternates between expansions and recessions. This short-run behavior is called business cycle . 5
The short run and the long run in macro Two Facts about the business cycle: 1. Unemployment rises during a recession and unemployment falls during an expansion. 2. Real GDP declines during a recession, and real GDP rises during an expansion. Disagreement on how to explain the business cycles. John Maynard Keynes: the business cycles represent disequilibrium and nonmarket-clearing behavior. Classical economics: the business cycle can be explained using equilibrium analysis. 6
The Keynesian approach John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936: high unemployment rate + low output represents a disequilibrium. Cyclical employment is involuntary unemployment. Output drops when firms would like to produce more at prevailing prices but are unable to do so. This perspective is referred as Keynesian economics : business cycles represent disequilibrium or nonmarket-clearing behavior. 7
The Classical approach Classical economics: The perspective that business cycles can be explained using equilibrium analysis. Classical view: the labor market and goods markets are in equilibrium during recessions. Households voluntarily reduce supply for labor. Firms voluntarily produce less. The majority of economists believe the basic Keynesian view is correct. We focus on the Keynesian view for the rest of the book. 8
Macroeconomic shocks and price flexibility Business cycles are caused by macroeconomic shocks : unexpected exogenous event that has a significant positive or negative effect on an important sector or the entire economy.

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