ch%209 - MACROECONOMICS MACROECONOMICS N.GregoryMankiw...

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MACROECONOMICS MACROECONOMICS N. Gregory Mankiw N. Gregory Mankiw C H A P T C H A P T E R E R Introduction to Economic Introduction to Economic Fluctuations Fluctuations 9 9
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2 CHAPTER 9 Introduction to Economic Fluctuations Facts about the business cycle GDP growth averages 3–3.5 percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GDP, but consumption tends to be less volatile and investment more volatile than GDP. Unemployment rises during recessions and falls during expansions. Okun’s Law : the negative relationship between GDP and unemployment.
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Growth rates of real GDP, consumption Percent change from 4 quarters earlier Average growth rate Real GDP growth rate Consumption growth rate
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Growth rates of real GDP, consump., investment Percent change from 4 quarters earlier Investment growth rate Real GDP growth rate Consumption growth rate
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Unemployment Percent of labor force
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Okun’s Law Percentage change in real GDP Change in unemployment rate = - 3 2 Y u Y 1975 1982 1991 2001 1984 1951 1966 2003 1987 2008 1971
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7 CHAPTER 9 Introduction to Economic Fluctuations Index of Leading Economic Indicators Published monthly by the Conference Board. Aims to forecast changes in economic activity 6-9 months into the future. Used in planning by businesses and govt, despite not being a perfect predictor.
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8 CHAPTER 9 Introduction to Economic Fluctuations Components of the LEI index Average workweek in manufacturing Initial weekly claims for unemployment insurance New orders for consumer goods and materials New orders, nondefense capital goods Vendor performance New building permits issued Index of stock prices M2 Yield spread (10-year minus 3-month) on Treasuries Index of consumer expectations
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Index of Leading Economic Indicators,   1970- 2010 Source: Conference Board 2004 = 100
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10 CHAPTER 9 Introduction to Economic Fluctuations Time horizons in macroeconomics Long run Prices are flexible, respond to changes in supply or demand. Short run Many prices are “sticky” at a predetermined level. The economy behaves much differently when prices are sticky.
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CHAPTER 9 Introduction to Economic Fluctuations Recap of classical macro theory  (Chaps. 3-8) Output is determined by the supply side: supplies of capital, labor technology Changes in demand for goods & services ( C , I , G ) only affect prices, not quantities. Assumes complete price flexibility.
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ch%209 - MACROECONOMICS MACROECONOMICS N.GregoryMankiw...

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