1 / 11

ECON 2003 MACROECONOMICS

ECON 2003 MACROECONOMICS. CHAPTER 9 INTRODUCTION TO ECONOMIC FLUCTUATIONS. Recessions : periods of falling incomes and rising unemployment Business cycle : short run fluctuations in outut and employment Short run fluctuations. TIME HORIZONS IN MACROECONOMICS.

hu-stevens
Download Presentation

ECON 2003 MACROECONOMICS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ECON 2003MACROECONOMICS CHAPTER 9 INTRODUCTION TO ECONOMIC FLUCTUATIONS Assoc. Prof. Yesim Kustepeli

  2. Recessions: periods of falling incomes and rising unemployment • Business cycle: short run fluctuations in outut and employment • Short run fluctuations Assoc. Prof. Yesim Kustepeli

  3. TIME HORIZONS IN MACROECONOMICS • Classical theory applies to the long run, not the short run. • The key difference between short run and long run is the behaviour of prices. • In the long run, output and velocity of money are fixed; a change in the money supply affects directly prices. Assoc. Prof. Yesim Kustepeli

  4. In short run, prices are not fully flexible; thus a change in the money supply may affect output and employment. • Economic fluctuations short run price stickiness • classical dichotomy no longer holds nominal variables affect real variables. Assoc. Prof. Yesim Kustepeli

  5. Model of AS and AD • Flexible prices are crucial for the classical theory. • When prices are sticky, output depends on the demand for goods and services. • Because monetary and fiscal policies can influence the economy’s output over the time horizon when prices are sticky, there is a rationale for why these policies may be useful in stabilizing the economy in the short run. Assoc. Prof. Yesim Kustepeli

  6. Short run: prices are sticky ; capital and labor are sometimes not fully employed. • Long run: classical model; prices are flexible; capital and labor are fully employed. • Very long run: basic theory of economic growth, cpital stock, labor force and technology can change. Assoc. Prof. Yesim Kustepeli

  7. AGGREGATE DEMAND • Aggregate demand is the relationship between quantity of output demanded and aggregate price level. • The quantity equation as aggregate demand : M*V = P*Y M/P = kY • For any fixed money supply and velocity, the quantity equation yields a negative relationship between P and Y. Assoc. Prof. Yesim Kustepeli

  8. Once PY is fixed, if P goesup, Y mustgodown. • Theaggregatedemandcurve is drawnfor a fixedvalue of themoneysupply. • Ifthemoneysupplychanges, theaggregatedemandshifts. • Ifthevelocity of moneychanges, theaggregatedemandshifts. Assoc. Prof. Yesim Kustepeli

  9. AGGREGATE SUPPLY • Aggregatesupplyis therelationshipbetweenthequantity of goodsandservicessuppliedandthepricelevel. • Thelongrun: theverticalaggregatesupplycurve • Accordingtotheclassical model, outputdoesnotdepend on thepricelevel. • Theverical AS curvesatisfiestheclassicaldichotomy; output is at itsfull-employmentornaturallevel. Assoc. Prof. Yesim Kustepeli

  10. Theshortrun: thehorizontalaggregatesupplycurve • Somepricesarestickyanddonotadjusttochanges in demand. • Changes in aggregatedemand affet thelevel of output. • Fromshortruntothelongrun • Longrunequilibrium is whereshortrun AS, longrun AS and AD intersect. • Changes in aggregatedemandaffectthelevel of output in shortrun but returntothelongrunlevel . Assoc. Prof. Yesim Kustepeli

  11. STABILIZATION POLICY • Exogenouschanges in AS or AD arecalledshockstotheeconomy. • Shocksto AD: demandshock • Shocksto AS: supplyshock • Onegoal of the AS and AD model is toshowhowshockscauseeconomicfluctuations. • Anothergoal of the model is toevaluatehowmacroeconomicpolicy can respondtotheseshocks:: stabilizationpolicy Assoc. Prof. Yesim Kustepeli

More Related