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unemployment and real GDP. (notes)oOkun’s Law: The connection between real GDP (Y) and the unemployment rate (u) oIdea: Since the labor force grows with population increases & since productivity rises, some economic growth (which createsjobs) is needed to keep the unemployment rate constant over time
oFormula: ∆%Y = 3 - 2 ∆u (via stat. studies)To be able to explain basic facts about the business cycle, includinghow 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 recessionis 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)oA business cycleis the combination of a recession and an expansionTo be able to explain the main causes of recessions. (notes)oAn abrupt external change or “shock” usually starts a recessionoA 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.oFinancial shocks: too much debt & lending plummets, rarebutsevere downturns, à C↓& I↓(2008)oOil shock:(1979, 1990, 2008, 1973: oil disruption due to Yom Kipper War)oFiscal Policy: federal spending & taxesRarecause of recessions (last: 1957)Deficit reduction didcontribute to slow growth since the end of the Great Recession – modest tax increases & spending cuts. oMonetary 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 theeconomy down & head off inflation. Now strong evidence that their strategy is working.”1. Very rapid growth & real GDP > pot. GDP2. More inflation likely – more than Fed’s goal3. 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)oWhat is the Fed expected to do with interest rates this year?