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OneSideOnePageNotes_Exam5 - Chpt. 23 Aggregate Demand &...

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Chpt. 23 Short-Run Economic Fluctuations o Economic activity fluctuates from year to year. In most years production of goods and services rises. On average over the past 50 years, production in the U.S. economy has grown by about 3 percent per year. In some years normal growth does not occur, indicating a recession. Short-Run Economic Fluctuations o A recession is a period of declining real incomes, and rising unemployment. o A depression is a severe recession. THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS 1. Economic fluctuations are irregular and unpredictable. Fluctuations in the economy are often called the business cycle. -- These fluctuations do not follow regular or easily predictable patterns. 2. Most macroeconomic variables fluctuate together. Most macroeconomic variables that measure some type of income or production fluctuate closely together. -- Although many macroeconomic variables fluctuate together, they fluctuate by different amounts. 3. As output falls, unemployment rises. Changes in real GDP are inversely related to changes in the unemployment rate. -- During times of recession, unemployment rises substantially. EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS The Assumptions of Classical Economics o Most economists believe that classical theory describes the world in the long run but not in the short run. o Changes in the money supply affect nominal variables but not real variables in the long run. o The assumption of monetary neutrality is not appropriate when studying year- to-year changes in the economy. Most economists believe that classical theory describes the world in the long run but not in the short run. If the quantity of money in the economy were to double, prices would double and so would incomes. Real variables would remain constant. HOWEVER : These changes will not occur instantaneously. It takes time for prices and incomes to change, and in the meantime, there can be real effects. The Model of Aggregate Demand and Aggregate Supply Two variables are used to develop a model to analyze the short-run fluctuations. The economy’s output of goods and services measured by real GDP. The average level of prices measured by the CPI or the GDP deflator. The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level. THE AGGREGATE-DEMAND CURVE
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This note was uploaded on 05/10/2010 for the course ECONOMICS 809-195-3K taught by Professor A.ordonez during the Spring '10 term at Gateway Tech.

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OneSideOnePageNotes_Exam5 - Chpt. 23 Aggregate Demand &...

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