Notes o okuns law the connection between real gdp y

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

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

 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)
o What is the Fed expected to do with interest rates this year?