Transcript MACROECONOMICS

MACROECONOMICS
Chapter 9
Introduction to Economic
Fluctuations
Short Run Fluctuations
What causes them?
 Can policymakers avoid recessions?
 Plan of the chapter

Data describing short run fluctuations
 Difference between long run and short run
 The basic model of AS-AD
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Figure 9.1 Real GDP Growth in the United States
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Mankiw: Macroeconomics, Seventh Edition
Copyright © 2010 by Worth Publishers
www.nber.org
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Investments are much
more volatile than
consumption
expenditures.
Figure 9.2 Growth in Consumption and Investment
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Mankiw: Macroeconomics, Seventh Edition
Copyright © 2010 by Worth Publishers
http://data.bls.gov/pdq/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000
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Okun’s Law
%Δ in Y = 3% - 2(Change in Unemployment Rate from one year to another)
Sep 08 to Sep 09 unemployment went from 6.2% to 9.8%, 3.6% increase.
Predicted change in Y will be -4.2%
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http://www.econ.yale.edu/alumni/conf2011/shiller-presentation.pdf
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Why Different Time Horizons?
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Why Different Time Horizons?
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In the long run prices are flexible;
complete adjustment.
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Money neutrality: changes in money supply
does not affect real variables.
In the short run prices are sticky.
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Real variables do respond to money in te
short run.
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Long Run
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In the long run, Y is determined with K, L, and
technology.
In the long run all the resources are fully
employed.
The long run Y is thus fixed.
The circular flow is in equilibrium because any
shock is dealt with price adjustment.
How do you show the supply of output (Y) in a
diagram where Y is the horizontal axis?
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Figure 9.7 The Long-Run Aggregate Supply
13Curve
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Copyright © 2010 by Worth Publishers
Aggregate Demand
If money supply and velocity were given
(fixed), then any change in the price level
will have to be compensated by a change
in Y to keep the nominal GDP fixed.
 What happens to the AD, if

Money supply increases?
 Money supply decreases?
 Velocity increases (money demand
decreases)?
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Velocity increase will bring an outward shift.
Money demand increase will bring an inward shift.
Our aggregate demand theory will include all the
expenditures by consumers, businesses,
government, and the rest of the world in future chapters.
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Long Run Adjustment
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Short Run
Suppose no prices adjust in the short run;
and when they do start to adjust, all the
prices adjust slowly, together.
 What will the short run aggregate supply
curve look like this year? Next year?
 How will the economy react in the short
run to a shift in AD?
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The equilibrium in the circular flow model is
now achieved through output adjustment.
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Figure 9.9 The Short-Run Aggregate Supply18
Curve
Mankiw: Macroeconomics, Seventh Edition
Copyright © 2010 by Worth Publishers
Figure 9.10 Shifts in Aggregate Demand in the Short
19 Run
Mankiw: Macroeconomics, Seventh Edition
Copyright © 2010 by Worth Publishers
Long and Short Run Equilibrium
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From SR to LR
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From SR to LR
There may be
many reasons
for an aggregate
demand increase.
The model in this
chapter will allow
us to either
increase the
velocity of money
or increase the
money supply.
Either one will
shift the AD to the
right.
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An Adverse Supply Shock
A general increase
in union negotiated
wages; sudden
increase in the prices
of widely used inputs;
regulation that adds
up to costs; crop
failure…
STAGFLATION
initially but back at
the starting point in
the long run.
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Accommodating an Adverse Shock
No
unemployment
increase but
permanent
increase in
the price level.
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