Chapter 9 (1) - CHAPTER9 IntroductiontoEconomicFluctuations...

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1 Chapter Nine CHAPTER 9 Introduction to Economic Fluctuations ® A PowerPoint Tutorial To Accompany   MACROECONOMICS, 7th. Edition N. Gregory Mankiw Tutorial written by: Mannig J. Simidian B.A. in Economics with Distinction, Duke University  M.P.A., Harvard University Kennedy School of Government M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management
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2 Chapter Nine A recent recession began in late 2007 From the 4 th quarter of 2007 to the 3 rd quarter of 2008, the economy’s production of goods and services expanded by a paltry .7%-- well below the normal rate of growth. In the 4 th quarter of 2008, real GDP fell at an annualized rate of 3.8 percent. The unemployment rate rose from 4.7 percent in November 2007 to 7.6 percent in January 2009. In early 2009, as this book was going to press, the end of the recession was not yet in sight, and many feared that the downturn would get significantly worse before getting better. As the book was going to press, the end of the recession was not in sight. Not surprisingly, the recession dominated the economic news of the time and the problem was high on the agenda of the newly elected president, Barack Obama.
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3 Chapter Nine Short-run fluctuations in output and employment are called the business cycle. In previous chapters, we developed theories to explain how the economy behaves in the long run; now we’ll seek to understand how the economy behaves in the short run.
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4 Chapter Nine GDP is the first place to start when analyzing the business cycle, since it is the largest gauge of economic conditions. The National Bureau of Economic Research (NBER) is the official determiner of whether the economy is suffering from a recession. A recession is usually defined by a period in which there are two consecutive declines in real GDP. In recessions, both consumption and investment decline; however, investment (business equipment, structures, new housing and inventories) is even more susceptible to decline.
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5 Chapter Nine In recessions, unemployment rises. This negative (when one rises, the other falls) relationship between unemployment and GDP is called Okun’s Law, after Arthur Okun, the economist who first studied it. In short, it is defined as: Percentage Change in Real GDP = 3.5% - 2 × the Change in the Unemployment Rate If the unemployment rate remains the same, real GDP grows by about 3.5 percent. For every percentage point the unemployment rate rises, real GDP growth typically falls by 2 percent. Hence, if the unemployment rate rises from 5 to 8 percent, then real GDP growth would be: Percentage Change in Real GDP = 3.5% - 2 × (8% - 5%) = - 2.5% In this case, GDP would fall by 2.5%, indicating that the economy is in a recession.
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6 Chapter Nine Many economists in business and government have the role of forecasting short-run fluctuations in the economy. One way that economists arrive at forecasts is through looking at leading indicators.
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This note was uploaded on 10/15/2010 for the course ECON Econ 104B taught by Professor Cannotremeberban? during the Summer '10 term at UC Riverside.

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Chapter 9 (1) - CHAPTER9 IntroductiontoEconomicFluctuations...

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