macronotes_cap_and_u

macronotes_cap_and_u - III Potential GDP and the Business...

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III Potential GDP and the Business Cycle We now begin our discussion of business cycles, chapter 11. Defnition 58 POTENTIAL GDP is the economy’s long run growth trend for real GDP. Defnition 59 The BUSINESS CYCLE are short term deviations of GDP from potential GDP. Real GDP Fuctuates above and below potential. In order for this to happen, we must have increases in labor, capital, or technology. We are looking at the supply side of booms and recessions. Given that GDP is above or below potential, which of labor, capital, or technology is changing? A Total hours The total population evolves in a rather stable way, but we can still have Fuctuations in total hours worked: Cyclical unemployment. As we saw earlier, demand for labor rises in a boom and thus unemployment falls. ±luctuations in hours per person. Demand for labor can raise the real wage and thus increase hours. About 2/3 of hours Fuctuations is due to the EXTENSIVE MARGIN: retirees and others not participating will jump in if wages are good enough. 1/3 is due to the INTENSIVE MARGIN. People working overtime and the like.
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macronotes_cap_and_u - III Potential GDP and the Business...

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