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Introduction to Economic Fluctuations Chapter 10 of Macroeconomics , 9 th edition, by N. Gregory Mankiw
Short-Run Fluctuations We have discussed the behavior of an economy in the long run In the short run, the economy fluctuates around its long-run path We need to understand why these fluctuations happen … … and what can be done to stabilize the economy —as far as possible—when fluctuations occur
BUSINESS-CYCLE FACTS
Some facts about the business cycle GDP growth averages 3 to 3.5 percent per year in the US over the long run But there are large fluctuations in the short run. Consumption and investment fluctuate with GDP, but consumption tends to be less volatile and investment more volatile than GDP. Unemployment rises during recessions and falls during expansions. Okun’s Law : there is a reliable negative relationship between the GDP growth rate and changes in the unemployment rate.
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 -4 -2 0 2 4 6 8 10 Growth rates of real GDP, consumption Percent change from 4 quarters earlier Average growth rate Real GDP growth rate Consumption growth rate
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 -30 -20 -10 0 10 20 30 40 Growth rates of real GDP, consumption, investment Investment growth rate Real GDP growth rate Consumption growth rate Percent change from 4 quarters earlier
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 0 2 4 6 8 10 12 Unemployment Percent of labor force
-3 -2 -1 0 1 2 3 4 -4 -2 0 2 4 6 8 10 Okun’s Law Percentage change in real GDP Change in unemployment rate 1975 1982 1991 2001 1984 1951 1966 2003 1987 2008 1971 2009 3 2 Y u Y
Index of Leading Economic Indicators Published monthly by the Conference Board. Aims to forecast changes in economic activity 6-9 months into the future. Used in planning by businesses and government, even though ILEI is not a perfect predictor.

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