Lecture_Notes_9 - ECONOMIC FLUCTUATIONS AS-AD and the...

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Unformatted text preview: ECONOMIC FLUCTUATIONS AS-AD and the Business Cycle CHAPTER 9 9.1 BUSINESS-CYCLE DEFINITIONS AND FACTS The business cycle is a periodic but irregular up- and-down movement in production and jobs. A business cycle has two phases, expansion and recession, and two turning points, a peak and a trough. Recession: It is a decrease in real GDP that lasts for at least two quarters (six months) or a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy. 9.2 AGGREGATE SUPPLY Aggregate Supply Basics The Aggregate supply curve shows a relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same. Other things remaining the same, When the price level rises and the money wage rate is constant, the real wage rate falls; the demand for labor increases (then employment rises) and the quantity of real GDP supplied increases. When the price level falls and the money wage rate is constant, the real wage rate rises, and employment decreases. The quantity of real GDP supplied decreases. 9.2 AGGREGATE SUPPLY Figure 9.3 shows the aggregate supply schedule and aggregate supply curve . Each point A to E on the AS curve corresponds to a row of the schedule. 9.2 AGGREGATE SUPPLY Potential GDP: It is the level of real GDP that the economy would produce if it were at full employment. We produce the goods and services that make up real GDP by using factors of production: labor and human capital, physical capital, land, and entrepreneurship. At any given time, the quantities of human capital, physical capital, land, entrepreneurship, and the state of technology are fixed. 9.2 AGGREGATE SUPPLY 1. Potential GDP : It is the level of real GDP that the economy would produce if it were at full employment. 2. Potential GDP is $10 tril and when the price level is 110, real GDP equals potential GDP. 3. If the price level is above 110, real GDP exceeds potential GDP . 4. If the price level is below 110, real GDP exceeds potential GDP. 9.2 AGGREGATE SUPPLY Changes in Aggregate Supply Curve: Aggregate supply changes (shifts) when any influence on production other than the price level changes. In particular, aggregate supply changes when Potential GDP changes. The money wage rate changes. The money prices of other resources change. 9.2 AGGREGATE SUPPLY Changes in Potential GDP: Anything that changes potential GDP changes aggregate supply and shifts the aggregate supply curve. Figure 9.4 on the next slide illustrates. 9.2 AGGREGATE SUPPLY The aggregate supply curve Shifts rightward from AS to AS 1 ....
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Lecture_Notes_9 - ECONOMIC FLUCTUATIONS AS-AD and the...

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