notes o Okuns Law The connection between real GDP Y and the unemployment rate u

Notes o okuns law the connection between real gdp y

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unemployment and real GDP. (notes) o Okun’s Law : The connection between real GDP (Y) and the unemployment rate (u) o Idea : Since the labor force grows with population increases & since productivity rises, some economic growth (which creates jobs) is needed to keep the unemployment rate constant over time
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o Formula: ∆%Y = 3 - 2 ∆u (via stat. studies) To be able to explain basic facts about the business cycle, including how real GDP and the unemployment behave during the business cycle, and how the 2007-2009 recession (sometimes called the "Great Recession") and its aftermath compares to other downturns. (Ch. 10.3 and notes) o “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” - National Bureau of Economic Research ( NBER ) o A business cycle is the combination of a recession and an expansion To be able to explain the main causes of recessions. (notes) o An abrupt external change or “shock” usually starts a recession o A shock external to the economy. 1. Monetary policy (to reduce inflation) 2. Oil shock (big price increase) 3. Fiscal (to quickly balance the budget) 4. Financial (lending falls) **Monetary policy & oil shocks are the most common causes in the postwar era. o Financial shocks : too much debt & lending plummets, rare but severe downturns, à C & I (2008) o Oil shock: (1979, 1990, 2008, 1973: oil disruption due to Yom Kipper War) o Fiscal Policy : federal spending & taxes Rare cause of recessions (last: 1957) Deficit reduction did contribute to slow growth since the end of the Great Recession – modest tax increases & spending cuts. o Monetary Policy Shock: Fed’s dual mandate: “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Why the federal funds rate is just above zero “They’ve [Fed] raised rates 6 times in a year to slow the economy down & head off inflation. Now strong evidence that their strategy is working.” 1. Very rapid growth & real GDP > pot. GDP 2. More inflation likely – more than Fed’s goal 3. Fed slows economy with higher interest rates
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To be able to explain the "key terms" in these sections and know how they relate to concepts and other key terms. (book)°°Readings -- Current Events"Fed Slows Down on Plans to Pursue Interest Rate Increases" (see the "Articles, Handouts, and Charts"folder)oWhat is the Fed expected to do with interest rates this year?
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