EC489Lecture3 - EC489.01 Special Topics in Economics:...

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EC489.01 Special Topics in Economics: Macroeconomics Lecture 3
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Where were we? Long run and very long run Classical theory and growth theory Flexible prices and smooth growth No role for nominal variables No role for short run dynamics
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This week (Today and Wednesday) Business Cycle Theory: The economy in the SR How can we explain them? What are the causes? Is there a recipe to avoid them? What policy instrument do we have to deal with it? Plan to finalize intermediate macro part: Showing short run economic fluctuations Long run vs Short run Introducing a AS-AD model to explain
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Facts about business cycle Hidden in long run growth rates Recession: A period of at least two consecutive quarters of declining real GDP Observable in real GDP, or parts of it Also in unemployment Okun’s law: Relationship btw unemployment and real GDP No trend in the long run
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Forecasting Short Run Fluctuations Business: Plan for future economic environment Government: Both affected and can affect Index of leading economic indicators
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Short run vs Long run Key difference: Behavior of prices Flexible prices adjusting according to supply- demand conditions icky prices at some predetermined level Sticky prices at some predetermined level Example: Reduction in money supply Neutral in the LR Real effects in the SR Let’s start introducing the model
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EC489Lecture3 - EC489.01 Special Topics in Economics:...

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