LEC V Short Run Model

LEC V Short Run Model - Click to edit Master subtitle style...

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Unformatted text preview: Click to edit Master subtitle style 11/8/10 Macro Module Lecture V Economic fluctuations and the short-run model 11/8/10 Economic Fluctuations  During recessions, output declinesoccasionally sharply  During expansions output rises quicklyusually faster than potential output is rising  Boom  Period of time during which real GDP is above potential GDP 22 11/8/10 Potential and Actual Real GDP 33 11/8/10 Employment 44 11/8/10 Unemployment Rate 55 11/8/10 Shifts in Labor Demand & Supply  Shifts in the [classical] labor demand curve  Not very large from year to year  Classical model cannot explain economic fluctuations through shifts in labor demand  Sudden shifts of the [classical] labor supply curve  Unlikely to occur  Could not accurately describe the facts of the economic 66 11/8/10 The Verdict  The Classical Model Cannot Explain Economic Fluctuations  We cannot explain the facts of short-run economic fluctuations with a model in which the labor market always clears.  The classical model  Assumes that the market always clears 77 11/8/10 What Triggers Economic Fluctuations?  Recession  Qualified people want to work at the going wage rate, but firms wont hire them  Boom  Firms - desperate to hire workers  Economy deviates from full-employment equilibrium of classical model 88 11/8/10 A Very Simple Economy  An economy with just two people  Total production in economy declines  Recession  Total output in economy rises  Expansion  Extremely unlikely 99 11/8/10 The Real-World Economy  Production - planned long before goods are actually sold  Interdependence: production-income  People spend their incomes  Firms receive revenue - to hire workers and pay them income 10 11/8/10 Examples of Recessions and Expansions  Recessions can be set off by  Increase in oil prices  Military cutbacks  Federal Reserve - sudden increases in interest rates  Strong expansions - caused by  Military buildups  Falling oil prices 11 11/8/10 Recessions  A decrease in spending  Production cutbacks in one or more sectors of the economy  Firms lay off workers  The laid-off workers cut back their own spending on other products  Causing further layoffs in other sectors  The economy can continue sliding downward, and remain 12 11/8/10 Expansions  Higher spending  Greater production  Higher employment  Greater spending  Possibly leading to a boom in which the economy remains overheated for some time....
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