Introduction to Economic FluctuationsChapter 10 of Macroeconomics, 9thedition, 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
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.
1970197519801985199019952000200520102015-4-20246810Growth rates of real GDP, consumptionPercent change from 4 quarters earlierAverage growth rateReal GDP growth rateConsumption growth rate
1970197519801985199019952000200520102015-30-20-10010203040Growth rates of real GDP, consumption, investmentInvestment growth rateReal GDP growth rateConsumption growth ratePercent change from 4 quarters earlier
1970197519801985199019952000200520102015024681012UnemploymentPercent of labor force
-3-2-101234-4-20246810Okun’s LawPercentage change in real GDPChange in unemployment rate19751982199120011984195119662003198720081971200932YuY
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.