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302-09 - CHAPTER Fluctuations CharlesEngel 9...

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C H A P T E R Introduction to Economic  Fluctuations University of Wisconsin Charles Engel 9
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CHAPTER 9.01 slide 2 In this chapter, you will learn… facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an introduction to aggregate supply in the short run and long run how the model of aggregate demand and aggregate supply can be used to analyze the short-run and long-run effects of “shocks.”
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CHAPTER 9.01 slide 3 Facts about the business cycle GDP growth averages 3–3.5 percent per year over the long run with 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 : the negative relationship between GDP and unemployment.
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Growth rates of real GDP, consumption -4 -2 0 2 4 6 8 10 1970 1975 1980 1985 1990 1995 2000 2005 Real GDP growth rate Average growth rate Consumption growth rate Percent change from 4 quarters earlier
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Growth rates of real GDP, consumption, investment -30 -20 -10 0 10 20 30 40 1970 1975 1980 1985 1990 1995 2000 2005 Percent change from 4 quarters earlier Investment growth rate Real GDP growth rate Consumption growth rate
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Unemployment 0 2 4 6 8 10 12 1970 1975 1980 1985 1990 1995 2000 2005 Percent of labor force
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Okun’s Law Percentage change in real GDP Change in unemployment rate -4 -2 0 2 4 6 8 10 -3 -2 -1 0 1 2 3 4 1975 1982 1991 2001 1984 1951 1966 2003 1987 3.5 2 = - Y u Y
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CHAPTER 9.01 slide 8 Increased stability of GDP – reading  by Trehan Why have fluctuations in GDP been smaller in the past 20 years? Fewer shocks? Better policy? We will move now into the examination of macro policy. While some argue that structural features of the economy have changed, so real shocks (oil price increase) have a smaller effect, that may in fact be a result of better policy.
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CHAPTER 9.01 slide 9 Time horizons in macroeconomics Long run: Prices are flexible, respond to changes in supply or demand. Short run: Many prices are “sticky” at some predetermined level. The economy behaves much differently when prices are sticky.
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CHAPTER 9.01 slide 10 Recap of classical macro theory  (Chaps. 3-8) Output is determined by the supply side: supplies of capital, labor technology.
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