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Unformatted text preview: Becker 2008 Edition Chapter 2 Page 1 of 13 Chapter 2 Business Cycles and Reasons for Business Fluctuations Business cycle: rise and fall of economic activity relative to its long-term growth trend. Macroeconomics: study of economy as a whole National income, unemployment, inflation. Microeconomics: studies consumers, producers, and suppliers operating in a narrowly defined market. Gross Domestic Product (GDP): most common measure of economic activity or output of an economy - Total market value of all final goods and services produced within the borders of a nation Nominal GDP: measures the value of all final goods and services in current prices. No inflation adjustment. Real GDP: measures the value of all final goods and services in current prices. Adjusted for inflation by using a price index. Price index (GDP Deflator): used to calculate real GDP. Real GDP = Nominal GDP x 100 GDP Deflator Business cycles Expansionary phase: rising economic activity (Real GDP) and growth. Peak: high point of economic activity. Contractionary phase: falling economic activity and growth and follows a peak. Trough: low point of economic activity. Recovery phase (expansionary phase): follows a trough and economic activity begins to increase Recession: economy experiences negative real economic growth. - Two consecutive quarters of falling national output. - Resources are underutilized and unemployment is high Depression: a very severe recession. Leading indicators (Before) - New unemployment claims - Building permits for residences - Average length of the workweek - Money supply - Prices of selected stocks - Orders for goods - Price changes of materials - Index of consumer expectations Becker 2008 Edition Chapter 2 Page 2 of 13 Lagging indicators (After) - Prime rate charged by banks - Duration of unemployment - Bank loans outstanding Coincident indicators (During/Contemporaneously) - Industrial production - Manufacturing and trade sales Aggregate Demand (AD) Curve: the maximum quantity of all goods and services the households, firms, and the government are willing and able to purchase at any given price level. Aggregate Supply (AS) Curve: - The maximum quantity of all goods and services producers are willing and able to produce at any given price level - Short run aggregate supply (SRAS) o Curve is upward sloping. As the price rises, firms are willing to produce more goods - Long run aggregate supply (LRAS) o Curve is vertical corresponding to the potential level of output in the economy AD, AS, and Economic Fluctuations: 1. Reduction in Demand: Shift left AD barb2down GDP barb2down P barb2down 2. Increase in Demand: Shift right AD barb2up GDP barb2up P barb2up 3. Reduction of Supply: Shift left SRAS barb2down GDP barb2down P barb2up 4. Increase in Supply: Shift right SRAS barb2up GDP barb2up P barb2down Factors that shift AD 1. Increase in wealth: W barb2up spend barb2up AD barb2up GDP barb2up P barb2up 2. Decrease in wealth: W barb2down spend barb2down...
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