Econ- Chap 14 - Overview Three key factors about economic...

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Overview Three key factors about economic fluctuations. The aggregate demand and aggregate supply model. The aggregate demand curve. The aggregate supply curve. Equilibrium in the SR & long-run.
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Short-Run Economic Fluctuations Economic activity fluctuates from year to year. In some years, the production of goods and services rises. In other years normal growth does not occur, leading to recession. A recession is a situation of declining real GDP, falling incomes and rising unemployment for two consecutive quarters.
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Three Key Facts About Economic Fluctuations Economic Fluctuations are Irregular and Unpredictable. Recessions occur with unpredictable frequency and duration. Most Macroeconomic Variables Fluctuate Together. Most macroeconomic variables are closely related and move together.
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Three Key Facts About Economic Fluctuations As Output Falls, Unemployment Rises. Changes in real GDP and the unemployment rate are inversely related. Labour demand depends on output. Y= f(K,L) Y is GDP
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Selling Cars in the US
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US Housing Starts
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TSX—Wealth Decline
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Economic Fluctuations Although there remains some debate about how to analyze short-run fluctuations, most economists use the model of aggregate demand and aggregate supply .
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Fluctuations
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Investment is volatile in Y=C+I+G+NX
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Unemployment rate
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Model of Economic Fluctuations Two variables are used in developing a model to analyze the short-run fluctuations: 1. The economy’s output of goods and services, measured by real GDP 2. The overall price level, measured by the CPI or GDP deflator The Model : Aggregate Demand and Aggregate Supply
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The Aggregate Demand and Aggregate Supply Model Quantity of Output Price Level SR Aggregate Supply Aggregate Demand P E Q E
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Aggregate Demand and Aggregate Supply The Aggregate Demand Curve shows the quantity of goods and services that households, firms and the government are willing to buy at different prices. The Aggregate Supply Curve shows the quantity of goods and services that firms would be willing to produce and sell at different prices.
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Tech boom and bust
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ECONOMIC “BUBBLES” An economic bubble is the commonly used term for an economic cycle that is characterized by a rapid expansion followed by a contraction, often in a dramatic fashion.
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NORTEL—NO LONGER EXISTS-TECH BUBBLE
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House price bubble
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Business cycles
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The Aggregate Demand Curve The aggregate demand for goods and services is: Y = C + I + G + NX Why is the aggregate demand curve downward sloping? 1. Pigou’s Wealth Effect 2. Keynes’ Interest Rate Effect 3. Real Exchange Rate Effect
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