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chapter8 - TheBusinessCycle CHAPTER8 Macroeconomics cycle,...

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  CHAPTER 8 The Business Cycle
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Macroeconomics Business cycles  are alternating periods of economic  growth and contraction. Macroeconomic theories try to  explain  the business  cycle, economic policies try to control it.
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Stable or Unstable? Prior to 1930s, macro economists thought there  could never be a Great Depression They believed that a market-driven economy was  inherently stable and that government intervention  was unnecessary. Classical theory or  Laissez faire  – very popular.
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A Self-Regulating Economy  According to the classical view, the economy “self-adjusts”  to deviations from its long-term growth trend. The corner stones of classical optimism were  flexible  prices  and  flexible wages . The Classical view of the macro economy was  summarized in Say’s Law. According to  Say’s Law , supply creates its own demand
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Say’s Law Unsold goods and unemployed labor could emerge in  this classical system. Both would disappear as soon as people had time to  adjust prices and wages.
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Macro Failure The Great Depression was a stunning blow to  classical economists. Unemployment grew and persisted despite falling  prices and wages.
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The Keynesian Revolution British economist, John Maynard Keynes developed  an alternate view of the macro economy. Keynes asserted that a market-driven economy is  inherently unstable . Small disturbances in output, prices, or  unemployment were likely to be magnified by the  invisible hand of the marketplace. In Keynes’ view, the inherent instability of the  marketplace required government intervention.
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Historical Cycles Swings in the business cycle are gauged in terms of  changes in total output (real GDP). Trough Peak REAL GDP (units per time period) TIME Growth trend Peak Peak Trough
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The Business Cycle The growth path of the U.S. economy is not a smooth  rising trend, but instead a series of steps, stumbles  and setbacks.
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The Business Cycle in U.S. History
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The Great Depression The Great Depression was the most prolonged  departure from long-term growth-path. Between 1929 and 1933, real GDP contracted a total of nearly  30%. In 1939, GDP per capita was lower than it had been in 1929. World War II ended the Great Depression by greatly  increasing the demand for goods and services. Real GDP grew an unprecedented 19% in 1942.
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The Postwar Years There have been 11 recessions since 1944.
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