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Unformatted text preview: Business cycles : Variations in real GDP around its long-run growth path. Natural GDP : The level of real GDP that is consistent w/ the economys natural rate of growth. Recession : A decline in real GDP lasting at least two consecutive quarters, which can cause real GDP to fall below its long-run natural GDP level. Trough : The point along a business cycle at which real GDP is at its lowest level relative to the long-run natural GDP level. Depression : An especially severe recession. Expansion : A point along a business cycle at which actual GDP begins to rise, perhaps even above its natural, long-run level. Peak : The point along a business cycle at which real GDP is at its highest level relative to the long-run, natural GDP level. Unemployment Rate : The 5 of the civilian labor force that is unemployed. Frictional unemployment : Workers are between jobs at any given time. New entrants, fired workers, workers that quit. Structural Unemployment: Workers abilities/skills dont match employers needs. Cyclical Unemployment: The unemployment resulting from business-cycles. Natural rate of unemployment: The frictional and structural components. MONEY & AGGREGATE DEMAND Equation of exchange : An accounting identity that states the nominal value of all monetary transactions for final goods and services is identically equal to the nominal value of the output of goods and services purchased: M x V = P x y where M=nominal quantity of money, V=Income velocity of money, P x y is equal to the price level for final goods and services multiplied by real GDP. Quantity theory of money : People hold money for transactions purposes. Velocity (V) is constant, or, at least, stable (=1/k). Real output (y) is constant w.r.t. labor supply. Therefore, changes in M will only change P. Aggregate Demand for output (y d ) derived from the demand for money. Income velocity of money: the average number of times a unit of money is used to purchase final goods and services within an interval. Long run equilibrium between aggregate demand and aggregate supply: There is an aggregate supply that reflects fully employed resource use. Changes in monetary policy will only affect y d and, so, will only cause prices to rise/fall. Real balance effect: An increase in the nominal rate of interest that results from an increase in the price level, holding total depository institution reserves unchanged. Things that affects the aggregate supply: labor force participation, labor productivity, marginal tax rates on wages, and provision of government benefits that affect household incentives w.r.t. supply labor. Short run aggregate supply , upward sloping: in the SR, wage adjustment lags. Now, increases in aggregate demand will increase real income as well as prices. Short Run Aggregate Supply- Wage inflexibility: Nominal wages are sluggish upwards-a rise in prices has delayed effect on wages. Nominal wages are inflexible d downwards- a fall in prices will result in lower Nominal wages are sluggish upwards-a rise in prices has delayed effect on wages....
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- Fall '07